In December 2004, Judge Denise Cote of the Southern District
of New York ruled on summary judgment motions by the defendant
underwriters of two WorldCom public securities offerings. The
opinion (In re WorldCom, Inc Securities Litigation) is
of great interest - and concern - to underwriters and their
advisers. It contains, after a long judicial silence, an
extensive analysis of underwriters' defences under Section 11
of the Securities Act and highlights challenges in establishing
them, particularly at the summary judgment stage of a lawsuit.
As a result of the decision, investment banks must reconsider
the due diligence burden they face in preparing to underwrite
shelf-registered securities offerings.
WorldCom is a class action focusing on the company's $5
billion and $11.9 billion debt offerings made in May 2000 and
May 2001, respectively. Each offering was a takedown under a
shelf-registration statement. At the heart of the case is
WorldCom's fraudulent accounting, which caused...