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UC To Go It Alone In WorldCom Lawsuit

Board of Regents Opts Out of Class Action Suit After Losing $353 Million In Stock In Largest-Ever Bankruptcy

Jan 22, 2003 | The California Aggie

After losing $353 million in WorldCom Inc. stocks, the University of California Board of Regents decided Thursday to file an independent lawsuit against the telecommunications company, rather than participate in a federal level class action suit led by New York State Comptroller Carl McCall.

The suit is scheduled to be filed in a California state court as early as today or by the end of this week.

WorldCom filed for bankruptcy in July 2002 after company executives inflated the value of the company, which was then the second-largest long distance telephone company in the United States.

“While we believe that class action treatment is often preferable, in this case the UC will likely obtain a more favorable result by withdrawing from the federal class action and filing a separate suit in California state court, asserting claims under California law,” said UC General Counsel James Holst in a press release.

Holst said that a key factor in the decision was the consideration of the size of the university’s loss on 10.2 million WorldCom stock shares and other related securities purchased between 1998 and 2000. The money lost from the stocks, however, only affected 0.7 percent of the UC’s diversified portfolio, which includes pension and endowment funds. The portfolio itself is currently worth close to $50 billion.

“The loss will not affect the retirement benefits provided to UC retirees nor the endowment’s support of the university’s academic mission,” said UC Treasurer David Russ. “Nonetheless, we feel a strong obligation to recover funds that rightfully belong to the university and its employees.”

Although the suit has not been filed and specificities are uncertain, UC spokesperson Trey Davis said that it would be ideal to reclaim all of the $353 million that they lost.

The UC has hired Joseph Cotchett as its outside counsel from the Bay Area law firm Cotchett, Pitre, Simon & McCarthy. Cotchett has experience handling similar cases in state court.

The suit will be filed under California securities fraud law against WorldCom, Salomon Smith Barney, Arthur Andersen LLP and/or Citigroup. As WorldCom’s auditor, Arthur Andersen signed off, thereby legitimizing, WorldCom’s fiscal statements. Arthur Andersen was also the former auditor of Enron. The accounting firm was found guilty of obstructing justice after it destroyed Enron’s inflated audits.

Dealings between WorldCom and Salomon are also being investigated. There are possible allegations of inaccurate research reports written about WorldCom by Salomon’s lead telecommunications analyst, Jack Grubman. Grubman may have written “unrealistically positive” research reports for the company in exchange for its investment banking business, according to the statement.

In June 1999, each share of WorldCom stock was worth up to $63.50 while the company had a market value of $125 billion. WorldCom then announced in June 2002 that it had incorrectly accounted $3.8 billion in expenses in a period of five quarters, inflating profits and consumer confidence. The company later admitted to other inaccurate bookings, resulting in more than $7 billion in financial restatements.

Several of the company’s executives have already pleaded guilty to conspiracy to commit securities fraud. WorldCom subsequently filed for Chapter 11 bankruptcy in July 2002. Under Chapter 11, the company is funded by bank loans while it is allowed to operate and reorganize. The company has until Apr. 17 to submit its reorganization plan in order to eliminate the threat of other competing party proposals.

Worth $107 billion in assets, WorldCom’s bankruptcy is the largest in U.S. history, exceeding Enron’s $64 billion. The UC is also spearheading a class action lawsuit against Enron in which the university lost $145 million.

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