Telephone call with CFO covered
- Proposed Sprint merger
- Overall growth for the year
- Use of proceeds
- Competitive environment
- Asked if there were any other material issues
- Reviewed board minutes, press releases and public
filings
- SAS 72 comfort letter and bring-down letter
- SAS 71 review of Q1 numbers
- Questions were forwarded to WorldCom
Two diligence calls with CFO covered
- Use of proceeds
- Bad debt reserves
- EPS estimates, credit ratings, competition
- Asked if there were any other material issues
- Reviewed board minutes, press releases and public
filings
- Arthur Andersen confirmed it hadn't issued any
management letters and assured there was nothing else material to discuss
SAS 72 comfort letter and bring-down letter
- SAS 71 review of Q1 numbers
- 2000 comfort letter had negative assurances which
weren't in 2001 letter
Raises significant questions about
how underwriters can satisfy requirements for due diligence defense
- Particularly in the context of shelf
registrations
- When time to conduct diligence is often
limited
- See Due diligence
- WorldCom underwriters argued that they were
entitled to rely on audited financials without further
investigation unless plaintiffs could establish that the underwriters had
actual notice of "red flags"
- Underwriters argued they were similarly
entitled to rely on auditor's comfort letters with respect to unaudited
interim financials
Court disagreed, holding that
deeper investigation was required because of red flags
- Reported E/R ratio was significantly lower than
peers
(due to fraudulent shift of line costs)
- Downturn in telecom industry had led peers to
take large asset impairment charges
A
jury could conclude that underwriters had not conducted a reasonable
investigation:
- Only a few cursory diligence calls were
made
- Underwriters failed to ask probing
questions
- In some cases, underwriters had
internally downgraded WorldComs credit ranking
- Some had hedged their own credit exposure
to WorldCom
Court relied on Rule 436 to make distinction that unaudited interim
financials are not an expertised part of a
registration statement
- Thus underwriters were required to make inquiry
- Couldn't rely solely on a comfort letter
Largest
ever securities fraud class action
