For Immediate Release
UC FILES SUIT AGAINST WORLDCOM IN CALIFORNIA STATE COURT
The University of California filed a complaint today (Feb. 13) on its behalf under California securities fraud law in California Superior Court against Salomon Smith Barney, Citigroup Inc. and Arthur Andersen LLP, accusing them of being involved in the staggering financial collapse of WorldCom Inc.
Filed in San Francisco, the complaint alleges that WorldCom, with the complicity of the defendants, engaged in a massive accounting fraud that inflated the price of its stock, damaging shareholders such as the university.
Salomon and its key telecommunications securities analyst Jack Grubman traded unreasonably positive reports on WorldCom for the lion’s share of its investment banking business, materially contributing to the overvaluation of WorldCom’s stock price.
WorldCom announced on June 26, 2002, that it had improperly booked $3.8 billion in expenses as capital expenditures, thereby boosting reported cash flow and profits. WorldCom has subsequently announced additional accounting improprieties, resulting in more than $7 billion in restatements of its financial reports. The announcement resulted in a collapse of WorldCom’s stock price and its eventual bankruptcy, the largest in U.S. history.
In the wake of the collapse of WorldCom’s stock price, several class action complaints were filed last spring and subsequently consolidated in federal district court in New York City, with the New York State Comptroller as lead plaintiff. UC has chosen to bring a separate suit rather than participate in the ongoing federal class action in New York.
Each securities case must be evaluated independently to determine whether class action or separate litigation is in the best interest of the university’s investment funds,” said James E. Holst, the university’s general counsel. “While we believe that class action treatment is often preferable, in this case the University of California will likely obtain a more favorable result by filing a separate suit in California state court, asserting claims under California law. A key factor in this determination was the size of the university’s losses on WorldCom stock.”
UC’s losses totaled in excess of $353 million, based on 10.2 million shares of WorldCom and related securities purchased between 1998 and early 2000. UC sold off all of its WorldCom holdings in June-July 2002. The value of UC’s diversified portfolio (as of 12/31/02), which includes both pension and endowment funds, stands at $49.9 billion.
"Our WorldCom losses, while substantial, represented only 0.7 percent of total funds under management,” said David H. Russ, the university’s treasurer. “As a result, the loss will not affect the retirement benefits provided to UC retirees nor the endowment’s support of the university’s academic mission. Nonetheless, we feel a strong obligation to recover funds that rightfully belong to the university and its employees.”
The complaint alleges misrepresentations in connection with purchase or sale of securities (Corporation Code section 25400), unfair business practices (Business & Professions Code section 17200), fraud and deceit, and breach of fiduciary duty. The university’s claims are based in part on Corporations Code section 25400, which creates liability for persons who make material false or misleading statements in connection with the purchase or sale of a security. In addition to its stock losses, UC will also seek punitive damages against at least some defendants.
UC has retained the Burlingame-based law firm of Cotchett, Pitre, Simon & McCarthy as counsel in the case. For the past decade, CPS&M (www.cpsmlaw.com) has been one of the preeminent securities litigation firms in the country.
The lost funds came out of the retirement system of UC employees and they should have the right to have this action heard by a California jury,” said attorney Joseph W. Cotchett.
A copy of the complaint is available in pdf format at www.ucop.edu/news/worldcom/complaint.pdf.
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