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Jersey Sues Over Huge Stock Losses

$150 Million Deficit In State Pension Funds Blamed On 'Wrongdoing' By EDS, Qwest, Sears, Tyco

Nov 26, 2002 | Star-Ledger

New Jersey officials said yesterday they will sue four companies to recover $150 million in stock market losses that they say were caused by corporate greed and misdeeds.

The lawsuits, one of which was filed yesterday, with the rest expected to be filed over the next two days are the first of what officials say will be a series of legal actions to recoup hundreds of millions of dollars in losses.

New Jersey's first lawsuit, filed yesterday in federal court in Manhattan, targets Electronic Data Systems, a Texas computer firm. The state also plans to sue Tyco International, an insurance and electronics conglomerate once headed by the son of a former Newark police detective; Qwest Communications, a struggling Denver telecommunications firm; and Sears Roebuck, the well-known retailer.

State officials say the state pension funds, which invest on behalf of 600,000 teachers and public employees, lost more than $150 million on those four stocks. In each case, officials said, the losses were the result of "active corporate wrongdoing," not an economic downturn.

Attorney General David Samson characterized the alleged misdeeds as "a betrayal of trust, fraud, gross mismanagement and greed."

"These are going to be pursued aggressively and are going to send a message to corporate wrongdoers that when they do something wrong, they're going to be held accountable," said Samson. "And they're going to be held accountable not only in civil suits, but in enforcement action by the Division of Securities and even, perhaps, future criminal action if the facts support them."

By going to court, New Jersey joins the maelstrom of legal and regulatory activity that has followed the collapse of the stock market two years ago.

"Improper corporate behavior will not be accepted," said Gov. James E. McGreevey, who appeared with Samson to announce the lawsuits. "The state of New Jersey has a fiduciary, moral and legal obligation to protect the interests of New Jersey taxpayers.

"New Jersey invested funds as well as our respective trust. Both were lost," the Governor added.

It its lawsuits, the state will charge that:

Qwest's executives engaged in insider trading, and that the company failed to disclose billions of dollars of off-balance sheet debt, improperly inflating Qwest's reported revenues.

Sears issued false and misleading statements about its prospects during a time when the state bought more than 500,000 shares of the company's stock.

Earnings shortfalls by EDS "may have resulted from improper revenue projections" in violation of generally accepted accounting practices.

Tyco engaged in widespread fraud and accounting improprieties.

Samson did not specify how much the state allegedly lost in each of those cases.

A Sears spokesperson, Jan Drummond, told the Associated Press in response: "These claims lack merit and we'll defend against them vigorously." EDS also rejected New Jersey's claims. "We believe our actions were proper and we intend to vigorously defend ourselves," spokesman Jim Baptiste said.

A Qwest spokesperson declined to comment. Calls to Tyco were not returned.

In a related matter, Samson said New Jersey has agreed to accept $1.4 million in fines from brokerage giant Merrill Lynch. It is the state's share of a $100 million national settlement of charges that Merrill Lynch issued misleadingly favorable reports about various companies to win lucrative investment banking contracts from executives at those firms.

That settlement is the result of an investigation by New York Attorney General Eliot Spitzer.

Samson said the settlement includes a unique provision that allows New Jersey to collect the money and still pursue separate legal action against Merrill Lynch if the company is implicated in any pension fund losses.

Since August 2000, the value of the state's investment portfolio has plummeted from $95.4 billion to a low of $68.2 billion last month a loss of $27 billion.

Because the state counts on steady investment gains to pay future pension benefits, the plunge means taxpayers may have to pay about $1 billion into the fund next year to make up for the losses.

In filing its lawsuits, New Jersey will join a legion of disgruntled investors who have gone to court to recover some of the huge losses suffered on Wall Street over the past two years. But Samson said New Jersey's cases are unique because they allege violations of specific New Jersey securities regulations.

Besides citing those four companies, the lawsuits name corporate officers, including Tyco executive Dennis Kozlowski, a Newark native, and the shattered accounting firm of Arthur Andersen.

Samson's office has lined up 10 teams of law firms to handle the securities cases. Among the firms cleared to pursue the litigation are several with prominent political pedigrees, including Wilentz Goldman & Spitzer, whose lawyers are among the Governor's most generous political supporters, and Lynch, Martin, Kroll, the firm the includes McGreevey's political mentor, John Lynch.

Attorneys are to be paid on a contingency basis, with the law firms responsible for up-front costs.

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