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IN RE WORLDCOM

October 11, 2005.

IN RE WORLDCOM, INC. SECURITIES LITIGATION. This Document Relates to: ALL ACTIONS.


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

OPINION & ORDER

In response to a June 14, 2005 Order to Show Cause, respondents the Succession of Hilliard M. Haik ("Dr. Haik"), Charlene M. Haik, Steven A. Haik, H. Michael Haik, Seannie Haik, and Holly M. Haik (collectively, the "Haik Repondents") argue that they should not be enjoined from pursuing their claims relating to investments in WorldCom, Inc. ("WorldCom") against Salomon Smith Barney Inc. ("SSB"), one of the Citigroup Defendants,*fn1 in a NASD arbitration proceeding. For the reasons described below, the Citigroup Defendants' application for enforcement of the claims release (the "Release") contained in the November 14, 2004 Judgment issued pursuant to the Citigroup Settlement (the "Judgment"), see In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2005 WL 2591402 (S.D.N.Y. Nov. 12, 2004), is granted.

  Background

  The relevant history of the WorldCom class action relating to the Citigroup Settlement was recently summarized in In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), ___ F. Supp. 2d ___, 2005 WL 2293190, at *2 (S.D.N.Y. Sept. 21, 2005) (the "2005 Settlement Opinion"). This Opinion incorporates that discussion by reference. All of the following facts are taken from the Haik Respondents' submissions, unless otherwise noted. Dr. Haik, a Louisiana ophthalmologist and clinical professor of ophthalmology, was the decision-maker with respect to his family's investment accounts, which were held by SSB. Dr. Haik made the investment decisions and oversaw a total of nine accounts for himself; his wife, Charlene; his two sons, Steven and Michael; and his two daughters, Holly and Seannie. An SSB broker named Miller Gordon Caffery, who was married to Dr. Haik's daughter Holly, managed the investments. All account statements were mailed to Dr. Haik's residence. Beginning in 1998, all Haik Respondents' accounts became heavily invested in WorldCom securities. The accounts contained a total of 22,834 shares, approximately eleven percent of which were purchased during the Class Period. In October 2003, Dr. Haik died of cancer.

  The Haik Respondents claim that they never received any notice of the class action. In a sworn declaration, in a seeming attempt to explain why the Haik Respondents did not receive notice of the class action, Charlene Haik explains that she changed residences at an unspecified date after Dr. Haik's death. In a letter of July 25, 2005, the Citigroup Defendants submitted property transfer documents to the Court establishing that Charlene Haik's new residence was not purchased until October 29, 2004 — after the opt-out deadline had passed and after class members would have received two notices of the class action. It is undisputed that none of the Haik Respondents opted out of the class action. On March 4, 2005, the Haik Respondents filed a Statement of Claim with the NASD, alleging violations of NASD suitability and fair dealing rules, breach of fiduciary duty, gross negligence, and violations of Louisiana securities law. These claims were premised largely upon the conflict of interest between SSB's analyst and investment banking functions in regard to WorldCom. After a communication from counsel for the Citigroup Defendants regarding the fact that the Haik Respondents had failed to opt out of the class action, the Haik Respondents filed a First Amended and Superseding Statement of Claim on May 19, 2005. On June 2, 2005, the Haik Respondents filed a Second Amended and Superseding Statement of Claim (the "Amended Statement of Claim"), which omits many of the specific allegations against SSB with respect to WorldCom but still indicates that "[t]his Statement of Claim is a case of [SSB's] conflicts of interest that detrimentally affected the Haiks." Similar allegations are described below. The Amended Statement of Claim also specifies that the Haik Respondents do not seek recovery for WorldCom shares purchased during the Class Period.

  Upon receipt of a letter from counsel for the Citigroup Defendants, on June 14, 2005, this Court issued an Order to Show Cause why the Haik Respondents should not be enjoined from pursuing their claims relating to investments in WorldCom against SSB in a NASD arbitration. In their submission in opposition to the Citigroup Defendants' application for an injunction, the Haik Respondents make several arguments. First, they argue that consideration of the Citigroup Defendants' application is premature and should be deferred until after the Fairness Hearing that was held on September 9, 2005. They also contend that the scope of the claims release ("Release") imposed pursuant to the Citigroup Settlement Judgment is too broad, and that they are not adequately compensated for their released claims. Finally, the Haik Respondents argue that they should be given an extension of time to opt out of the action, based on the doctrine of excusable neglect.

  The Haik Respondents have moved to substitute a signed declaration for an unsigned copy originally attached to their opposition papers and for leave to file a reply memorandum. Both motions are granted in an accompanying Order, and those submissions are considered in this Opinion.

  On August 26, 2005, the Haik Respondents filed a motion for extension of time to file proofs of claim in the class action pending a ruling on the Citigroup Defendants' application for an injunction. That motion is granted in the accompanying Order.

  Discussion

  1. Timing of the Citigroup Defendants' Request

  The Haik Respondents argue that consideration of the Citigroup Defendants' application for an injunction should be delayed until after the Fairness Hearing on September 9, 2005. Although this argument is now moot, as the settlements considered in the September 9 Fairness Hearing have been approved, see WorldCom, 2005 WL 2293190, at *1, it would be rejected in any event. SSB is among the Citigroup Defendants, and the Court issued the Judgment regarding those defendants, including the Release, on November 12, 2004. The September 9, 2005 Fairness Hearing involved the approval of settlements between the Lead Plaintiff and a number of other defendants.

  2. Validity and Applicability of the Release

  The Haik Respondents make two general arguments as to why the Release is overbroad and should not bar their claims. Although they admit that some of their claims "are factually similar to the claims raised in the Class Action (i.e. Citigroup's failure to disclose its conflicts of interest with WorldCom and its investment banking business)," they contend that "those claims involve conduct that, for the most part, predates the Class Period." The Haik Respondents argue that they were not adequately represented in the class action because their claims are not based on the same factual predicate as the class action claims, and that extinguishment of their arbitration claims would therefore violate their due process rights. They also argue that, if their arbitration is enjoined pursuant to the Release, they will have received "grossly inadequate consideration for their released claims."*fn2 The scope of a claims release is limited by the "identical factual predicate" and "adequacy of representation" doctrines. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., 396 F.3d 96, 106 (2d Cir. 2005). Class members' claims may be barred "where there is a realistic identity of issues between the settled class action and the subsequent suit, and where the relationship between the suits is at the time of the class action foreseeably obvious to notified class members." TBK Partners, Inc. v. Western Union Corp., 675 F.2d 456, 461 (2d Cir. 1982). A class action settlement may "prevent class members from subsequently asserting claims relying on a legal theory different from that relied on in the class action complaint, but depending on the very same set of facts." Nat'l Super Spuds, Inc. v. N.Y. Mercantile Exch., 660 F.2d 9, 18 n. 17 (2d Cir. 1981). "[A]dequate representation of a particular claim is determined by the alignment of interests of class members, not proof of vigorous pursuit of that claim." Visa, 396 F.3d at 113.

  The Haik Respondents' original Statement of Claim is substantively identical to the passages of the class action complaint that allege conflicts of interest between SSB's analyst department, including the prominent telecommunications analyst Jack Grubman, and its investment banking wing, which allegedly encouraged SSB's analysts to issue only positive reports about clients, including WorldCom.*fn3 The Haik Respondents' briefs emphasize that their allegations are in reference to a conflict of interest that existed prior to the Class Period, but the original Statement of Claim refers to no facts relating to SSB's conflict of interest prior to 2000. Even the Amended Statement of Claim provides only the following allegations specifying any sort of timeframe: "By early 2000, the stock market began to slide and at that time [SSB] was clearly aware that its research reports and stock recommendations were ...


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