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

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As noted above, the NYSCRF’s investigation uncovered another prong of this nefarious quid pro quo relationship. Unbeknownst to investors, in late 1999, Salomon and Grubman arranged for Ebbers to receive a half billion dollar loan from Travelers, which is, like Salomon, a unit of Defendant Citigroup. 281. This loan was made only a few months before WorldCom was to select the lead underwriters on the $5 billion bond offering in May 2000. Id. To conceal the identity of the borrower, the loan was not made to Ebbers himself, but to a shell corporation called Joshua Timberlands LLC, which Ebbers created for the purpose of receiving the loan proceeds. Id. Ebbers then took this money and bought approximately half a million acres of timberland of questionable value in three southern states. Id. Sources say that Grubman likely received a “finder’s fee” for brokering this valuable deal. 289. As the third and final prong of the scheme, Salomon agreed to continue providing WorldCom with the currency that every telecommunications company coveted -- glowing analyst reports issued by Grubman. These reports were critical to artificially inflating the price of WorldCom securities. 256. The “trifecta” offered by Salomon -- hot IPO shares, hundreds of millions of dollars in personal loans, and consistently bullish analyst reports -- worked, at least from Salomon’s perspective. As noted above, shortly after Ebbers received a half billion dollar loan from Citigroup’s Travelers, Citigroup’s Salomon landed the choice spot as co-lead underwriter for the two Offerings at issue in this litigation. 12. All told, between October 1997 and February 2002, WorldCom retained Salomon for almost two dozen investment banking deals that generated more than $107 million in fees for Salomon. 45. For that period, the fees generated by this one client alone accounted for more than 10% of the investment banking fees Salomon received from services it provided to the entire telecom sector. 11, 221. Further, although Grubman consistently and stridently told investors to buy every share they -22-
could of WorldCom, he never informed them that his compensation -- approximately $20 million per year ( 11,13) -- depended on whether they took his advice, or that his “independent” recommendation had been purchased as part of an investment banking package of services that had been marketed to WorldCom. 273. These facts -- and the material conflicts of interest they created -- were well known to Salomon and Citigroup. Indeed, even as Salomon represented to the investing public that Grubman was an independent analyst, it was widely acknowledged within Salomon that Grubman was not an analyst, but an investment banker. 243. Grubman’s compensation depended on the amount of investment banking business he generated for Salomon. 11, 13. In 2001, for example, Grubman justified his income by listing on his personal evaluation ninety-seven investment banking transactions in which he was involved, which generated total investment banking revenues of $166 million. 244. When Grubman attended Ebbers’ wedding in 1999, he billed the costs of the trip to Salomon’s investment banking division, not to the research department. 246. By December 2000, senior Salomon officers were privately admitting that there was “legitimate concern” about the objectivity of their analysts, a “rising issue of research integrity,” and a “basic inherent conflict” between the research and investment banking departments. 234. In February 2001, the global head of Salomon’s retail stock selling division proclaimed Salomon’s research “basically worthless” because of the rampant conflicts of interest. Id. Nevertheless, Salomon continued to allow Grubman to churn out report after report on WorldCom, knowing full well that investors were relying on those reports, but too attracted by the prospect of even more investment banking fees to have him do otherwise. -23-
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 and 30: ampant “internal chicanery and co
Page 31 and 32: would have seen billions of dollars
Page 33 and 34: esponsibilities to investors. By th
Page 35 and 36: even went so far as to ridicule inv
Page 37: million. 228. Salomon often alloca
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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