In re WorldCom, Inc. Securities Litigation

Bert C. Roberts (defendant) was a long-time employee of telecommunications provider MCI, serving in various positions, including as MCI’s chief operating officer. When WorldCom, Inc. (defendant) acquired MCI, Roberts became WorldCom’s board chairman. As WorldCom’s chairman, Roberts signed registration statements that incorporated both audited and unaudited financial statements. In June 2002, WorldCom announced a major restatement of its most recent financial statements and filed for bankruptcy soon thereafter. WorldCom shareholders (shareholders) (plaintiffs) sued WorldCom, Roberts, and others, alleging, among other things, that WorldCom engaged in accounting fraud and that WorldCom and Roberts thus violated § 11 of the Securities Act of 1933. Roberts moved for summary judgment based on § 11’s due-diligence affirmative defense. Specifically, Roberts contended that he reasonably relied on subject-matter experts in believing that WorldCom’s audited and unaudited financial statements were not false or misleading. The shareholders (who acknowledged Roberts did not know the financial statements were false or misleading) responded that Roberts had to show more than mere reasonable reliance on experts with respect to the unaudited financial statements. The shareholders further argued that summary judgment was unwarranted with respect to whether Roberts reasonably relied on experts regarding the audited financial statements because there was evidence that he ignored red flags that the audited financial statements were incorrect.