Worldcom, Inc. Summary

In re Worldcom, Inc. Sec. Litig. 346 F.Supp. 2d 628 (SDNY) 2004

This case addresses the issue relating to an underwriter's due diligence obligations. Many parties in the combined securities filed for a summary judgement after the collapse of Worldcom. The plaintiff wants a assertion that financials incorporated in the registration statements for two WorldCom bond offerings of 2000 and 2001 contained material misstatements. The underwriters of these bond offerings seek an assertion that they are not liable for the false statements in the WorldCom financials that accompanied the registration statements or for the alleged omissions from those registration statements.

The plaintiff highlights that the underwriters did almost no investigation of

The Underwriter Defendants' motion is granted as to listed omissions 12-18 and 20 for the 2000 Registration Statement, and 8, 16-20, 22-29, 31-33, 35, and 39-42 for the 2001 Registration Statement

a) Houghton v. Saunders

Houghton v. Saunders is an interlocutory petition carried out in the New Zealand High Court. The defendants demanded the court to terminate certain causes of action and to re-evaluate and rescind the orders fixed by the lower courts.

In May 2004, Feltex Carpets Limited (Feltex) had sold its shares by way of an initial public offering (IPO). It had even registered a prospectus with the Registrar, which had projected a net profit after tax for the year ending June 2005 to be $23.9 million.

In less than an year after the offering of May 2004, on March 31, 2005, Feltex declared a reduction of the profit forecast to from a high of $23.9 million to a mere $15–$16 million. Consequently, by March 2006, the value of the shares fell from $1.70 per share (which was the initial purchase price), to as low as $0.60 per share. The company soon went into liquidation in December 2006. By this time all the shareholders’ equity had disappeared and the creditors were left with claims approximating to around $30–$40

The plaintiffs had acknowledged that the words “on the faith of” in section 56 of the N.Z. Act introduced a tinge of genuine confidence. However, they asserted that the reliance need only be placed on the registered prospectus (as opposed to the particular untrue statement in the prospectus). In response to this argument, Justice French stated:

In addition to the above, section 56 also mandatorily necessitates the loss or damage to have been sustained “by reason of the untrue statement mentioned in the prospectus issued at the tome of the IPO.” It does not mention by reason of the prospectus. Hence , according to this tshe wording would seem necessarily to require actual reliance on the untrue statement itself.

Justice French also identified that in the framework of section 56, “reliance bears on causation.” These statements show that the test of reliance seems to morph into causation. He then again stated his conclusion on the lines of the Securities Act, that it will need the evidence to prove the there was reliance on the untrue statement stated in the prospectus. This will necessarily vary from one individual to the other, and means that the necessary commonality of interest to justify a representative action of both the groups was