Banking & Capital Markets

WorldCom Fraud Not Pinned Down

A number of underwriters now defending a lawsuit believe that some of WorldCom's filings were, indeed, false -- but to keep their legal options ope...
Craig SchneiderAugust 26, 2004

Seventeen former WorldCom Inc. bond underwriters have adopted an unlikely defense in a lawsuit brought by angry investors — they’re denying that any of the telecom giant’s financial statements were false.

Questioned by The Wall Street Journal, some of the underwriters said they believe that some of WorldCom’s filings were, indeed, false. However, spokeswomen for two banks told the Journal that to keep their legal options open, for the time being they must maintain otherwise until it is determined which filings are false and how they were misstated.

The underwriters, led by J.P. Morgan Chase, Deutsche Bank, and Bank of America, in June rejected a combined $2.87 billion settlement offer.

The unusual legal strategy was revealed at a teleconference hearing last week by the banks’ attorney, Jay Kasner of Skadden Arps Slate Meagher & Flom. Kasner also stressed that the banks reserved the right to change their responses “as we discover new information.”

“This is just hard to believe,” said U.S. District Judge Denise Cote of Manhattan, according to the Washington Times.

Under review at the hearing were the banks’ responses to specific requests that they admit or deny the falsity of specific line items in Worldcom’s financials for 1999, 2000, and early 2001. Among the items were line-cost expenses, which WorldCom itself has admitted it fraudulently understated during those periods, the Journal reported.

Added Judge Cote, “I have serious questions about whether a denial across the board can be in good faith at this point in the litigation.”

Kristin Lemkau, a spokeswoman for J.P. Morgan, told the paper that the banks’ position does not amount to an across-the-board denial. “The financial fraud and its concealment from us has been the centerpiece of the underwriters’ defense for two years and is a substantial part of our motion for summary judgment to have the entire case dismissed,” said Lemkau. She added that this is different from responding to “a particular line item in a particular financial statement … an issue which involves, among other things, accounting judgment and a review of the discovery record, which is not complete.”

Separately, a spokesman for the New York State Common Retirement Fund, the lead plaintiff, told the Journal that they have agreed to a settlement in principle with 10 former WorldCom directors but would not discuss the terms. The directors agreed to pay more than $50 million to settle allegations that they didn’t properly oversee the companies finances, the paper noted, citing a person familiar with the matter.

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