Lead Plaintiff's Memorandum of Law in Opposition to Defendants'

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then WorldCom’s Director of International Finance & Control, sent an e-mail to WorldCom executives and Andersen, the Company’s purportedly independent auditor, notifying them that, after the books for the International Division had closed for the first quarter of 2000, an entry had been made on the books that reduced the International Division’s line cost expenses by $33.6 million. 96(a). When Brabbs questioned the entry, he discovered that Sullivan had directed the entry be made, but Brabbs never received any justification for this accounting treatment. Id. Shortly thereafter, in April 2000, Brabbs reviewed his division’s first quarter results and the questionable transfer with a “high level” Andersen UK partner in the United Kingdom. 96(b). Brabbs told the Andersen UK partner that the increase in margin trend as a result of the fraudulent transfer was “obvious” and urged him to consult with Andersen in the United States. Id. Shortly thereafter, Brabbs received an e-mail from Myers, who expressed anger that Brabbs had raised the issue with Andersen. 96(c). The entry was never corrected; to the contrary, to try to hide the adjustment, WorldCom established a fictitious entity and placed the costs on the books of that sham entity, where it remained until the fraud was disclosed more than two years later. 96(d). The first gatekeeper had thus become complicit in the fraud. As WorldCom’s independent auditor, Andersen was required to exercise professional skepticism in conducting the WorldCom audits. Despite having actual knowledge that WorldCom’s management was fraudulently capitalizing line costs that should have been treated as regular operating expenses, none of the Andersen entities ever investigated WorldCom’s practices of accounting for these line costs or corrected the accounting treatment. 96, 317. Indeed, these phony journal entries remained on WorldCom’s books until after Andersen was replaced as WorldCom’s auditor in May 2002. 317. Had the Andersen entities ever brought the required level of “professional skepticism” to a review of WorldCom’s general ledger, they -14-
would have seen billions of dollars worth of entries that had no supporting documentation. 432. Instead, they turned a blind eye and allowed the fraud to continue. As 2000 continued, the telecommunications industry continued to deteriorate. 88. By July 2000, WorldCom’s most senior officers were well aware that WorldCom’s revenues were falling precipitously and that this decline “created a substantial risk that WorldCom’s publicly reported income would fail to meet the expectations of Wall Street analysts.” 89 (quoting SEC Complaint). In October 2000, only days before the Company was to announce its third quarter results, Sullivan told Sidgmore -- then the Vice Chairman of the Board -- that WorldCom was in a “really scary” situation of escalating costs and declining revenue. 338. Sidgmore responded “Wow! I had no idea that the revenue growth had deteriorated that much,” and added that “it’s going to take some pretty fancy explaining.” Id. (quoting an e-mail described by The Washington Post). Sullivan agreed, and told Sidgmore that, to make sure WorldCom would meet its earnings targets for the third quarter, Sullivan would make some accounting manipulations, reclassifying what should have been booked as revenue as “cost reductions.” Id. As a result, on October 26, 2000, WorldCom reported results that, while falling short of revenue estimates, nonetheless met or exceeded analysts’ earnings expectations. 339. Once again, another supposed gatekeeper -- the Vice Chairman of the Board -- had acquiesced to Sullivan’s manipulations. Despite the accounting machinations, WorldCom’s business continued to fade, and Ebbers and his colleagues became increasingly desperate. In January 2001, Ebbers had dinner with, among others, Sullivan, Myers, Ron Beaumont (WorldCom’s Chief Operating Officer), and another senior WorldCom employee, Tom Bosley, to discuss the state of the Company’s business. 99. As later recounted in a Myers e-mail, at that dinner, with Ebbers looking on, Bosley volunteered “to do -15-
Page 1 and 2: UNITED STATES DISTRICT COURT SOUTHE
Page 3 and 4: TABLE OF CONTENTS TABLE OF AUTHORIT
Page 5 and 6: POINT III .........................
Page 7 and 8: Capri v. Murphy, 856 F.2d 473 (2d C
Page 9 and 10: Admin. Proc. File No. 3-4390, 1975
Page 11 and 12: 143 F. Supp. 2d 304 (S.D.N.Y. 2001)
Page 13 and 14: Milman v. Box Hill Sys. Corp., 192
Page 15 and 16: Taylor v. Vermont Dept. of Educ., 3
Page 17 and 18: Alan G. Hevesi, Comptroller of the
Page 19 and 20: arguments withstands scrutiny. They
Page 21 and 22: Asset Management, Inc. (“HGK”)
Page 23 and 24: WorldCom’s stock and bonds. Moreo
Page 25 and 26: illion. 5. 6 The accounting fraud,
Page 27 and 28: method of committing financial frau
Page 29: ampant “internal chicanery and co
Page 33 and 34: esponsibilities to investors. By th
Page 35 and 36: even went so far as to ridicule inv
Page 37 and 38: million. 228. Salomon often alloca
Page 39 and 40: could of WorldCom, he never informe
Page 41 and 42: e-mail admitted that he maintained
Page 43 and 44: (Count IV). The Complaint also alle
Page 45 and 46: various of the Underwriter Defendan
Page 47 and 48: ought on behalf of other class memb
Page 49 and 50: Complaint filed by the NYSCRF -- as
Page 51 and 52: The Underwriter Defendants assert t
Page 53 and 54: The plain language of Section 11 es
Page 55 and 56: Retirement Income Security Act (“
Page 57 and 58: inconsistent with the overall purpo
Page 59 and 60: Pollack v. Laidlaw Hold., Inc., No.
Page 61 and 62: POINT II THE COMPLAINT STATES CLAIM
Page 63 and 64: omitted); see also Cromer Finance,
Page 65 and 66: his hand-picked CFO, then ordered t
Page 67 and 68: In addition, Ebbers contends that t
Page 69 and 70: much in charge and knowledgeable ab
Page 71 and 72: Ebbers’ motive to artificially in
Page 73 and 74: they specifically made. For example
Page 75 and 76: public statements, (b) failed to re
Page 77 and 78: Exchange and the National Associati
Page 79 and 80: Similarly, the Complaint alleges sc
Page 81 and 82:
Tex. 2002). Significantly, each of
Page 83 and 84:
For all these reasons, the fraud cl
Page 85 and 86:
Further, the Complaint provides gre
Page 87 and 88:
the other hand, when tidal waves of
Page 89 and 90:
See Complete Mgmt. Inc. Sec. Litig.
Page 91 and 92:
exerted” by U.S. senior finance m
Page 93 and 94:
discredited this hypothesis. The ra
Page 95 and 96:
statements for the Offerings or in
Page 97 and 98:
ecommended violated anti-fraud prov
Page 99 and 100:
y failing to disclose to his custom
Page 101 and 102:
at the time the reports were issued
Page 103 and 104:
2. Grubman’s Buy Recommendations
Page 105 and 106:
continue to pursue the acquisitions
Page 107 and 108:
allegations that establish that the
Page 109 and 110:
facts, if taken as true, are certai
Page 111 and 112:
4. The Complaint Adequately Alleges
Page 113 and 114:
the stock. To the extent that the d
Page 115 and 116:
conflicts of interest between Salom
Page 117 and 118:
allege loss causation. 2000 WL 6406
Page 119 and 120:
In Jacobs v. Coopers & Lybrand, L.L
Page 121 and 122:
issued in connection with the Offer
Page 123 and 124:
settled principle of law that direc
Page 125:
Named Plaintiffs’ Counsel: BERMAN
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Lead Plaintiff's Memorandum of Law in Opposition to Defendants'

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