Opinion
Master File No. 02 Civ. 3288 (DLC).
June 9, 2005
ORDER
Attached is a draft of proposed revisions to paragraphs 11 through 16 of the June 7, 2005 draft of the Supplemental Plan of Allocation. This draft will be discussed at today's 9:30 a.m. conference call.
11. The plaintiffs have determined that the first partial disclosure of the fraud occurred on January 29, 2002. The last disclosure during the class period occurred on June 25, 2002, and Stanford Consulting has determined that the effect of the June 25 disclosure is best measured by the price of WorldCom Securities on July 5, 2002. Stanford Consulting calculated how much of the decline in the price of WorldCom Securities between January 29 and July 5, 2002, was due to the decline in the price of telecommunications industry securities generally or to the decline in the [prices of securities on the securities markets as a whole] [Nasdaq market, the market on which WorldCom shares were publicly traded]. By subtracting this industry and market effect on the price of WorldCom Securities [shares], Stanford Consulting isolated the decline in the price of WorldCom's Securities [shares] that it reasonably believed was caused by the fraud. This decline represents the reasonable amount by which WorldCom Securities [shares] were artificially inflated prior to January 29, 2002. Stanford Consulting has used this number to calculate for each of the WorldCom Securities what percentage of its closing market price as of January 28, 2002 — the last trading day before January 29 — was artificially inflated.
On June 25, 2002, WorldCom announced . . .
Stanford Consulting chose July 5, 2002 as the date that best measures the effect of the disclosures during the Class Period because, among other things, WorldCom common stock was subject to a trading halt for three trading days after the June 25, 2002 announcement, that is, June 26 through June 28. Then, on July 1, the first date on which WorldCom's common stock traded after June 25, the market price of WorldCom common stock fell to $0.06, but rose over the next several days to $0.25 on July 5, and remained near that price for some time.
12. The plaintiffs contend that WorldCom made twelve materially false and misleading quarterly earnings disclosures during the period from April 29, 1999, the first day of the Class Period, through January 28, 2002. WorldCom overstated each quarter's earnings throughout the entire Class Period. Accordingly, the cumulative amount of the earnings overstatement grew with each succeeding quarter.
13. Stanford Consulting allocated the total artificial inflation which it had calculated to exist as of January 28, 2002, to each quarterly period during the class period before January 28, 2002. It did so in direct proportion to the relationship that each such period's earnings overstatement bore to the total amount of the earnings overstatement in WorldCom's SEC filings. Because the cumulative overstatements grew with each succeeding quarter, the percentage of the total artificial inflation attributable to a quarter also increased with each succeeding quarter. Accordingly, this proposed Supplemental Plan of Allocation starts with relatively smaller inflation percentages during the first quarters of the Class Period and provides for gradually increasing inflation percentages over the time until the percentage inflation in the market prices of the WorldCom Securities reaches almost 100% for the fourth quarter of 2001.
14. The Private Securities Litigation Reform Act limits the maximum amount of damages which a plaintiff can recover for a violation of the federal securities laws to the difference between the purchase price paid and the mean trading price of the security for the 90-day period beginning on the day (here, June 25, 2002) on which the information correcting the misstatements or omissions that are the basis for the action is disseminated to the market. This is known as the PSLRA 90-Day Lookback Provision. When damages are calculated by using the price of WorldCom Securities on July 5, 2002, the PSLRA 90-Day Lookback Provision does not result in any adjustment of the maximum amount of recoverable damages by class members for purchases of WorldCom stock, MCI Tracking Stock, WorldCom Predecessor Preferred Stock, or QUIPs. In contrast, the PSLRA 90-Day Lookback Provision does result in an adjustment of the maximum amount of recoverable damages by class members for purchases of Pre-Existing WorldCom Bonds and WorldCom Predecessor Bonds.
15. Damages for the Pre-Existing WorldCom Bonds and WorldCom Predecessor Bonds are based on a determination of the amount by which the price actually paid exceeded the price of those securities on June 26, 2002, the first day after the end of the Class Period, [move to paragraph 8 or thereabout?][contrast to July 5 calculation for shares?]
16. [paragraph 11 for 6/7 draft]