## Facts

- WorldCom, a telecommunications company, issued two registered debt offerings: approximately $5 billion in 2000 and approximately $11.9 billion in 2001.
- The offerings used shelf registration statements that incorporated by reference WorldCom’s SEC filings, including audited and unaudited financial information.
- WorldCom later announced a major restatement tied to improper accounting, including line-cost accounting; it then filed for Chapter 11.
- Investors brought consolidated Securities Act claims in an MDL, including § 11 claims against the underwriting syndicate for alleged material misstatements and omissions in the offering documents.
- Arthur Andersen issued unqualified audit opinions and comfort letters regarding portions of the financial disclosures.
- Plaintiffs contended the underwriters’ diligence was superficial despite warning signs, including internal credit concerns and public reporting questioning WorldCom’s financial condition.

## Issues

1. Whether the underwriters established the § 11(b) due-diligence defense as a matter of law for alleged misstatements and omissions in the registration statements and incorporated disclosures.
2. Whether reliance on Arthur Andersen’s audit opinions and comfort letters entitled the underwriters to summary judgment, including as to unaudited interim information.
3. How the “expertised” versus “non-expertised” distinction under § 11 affects the underwriters’ investigation and belief requirements.
4. Whether alleged omissions (including the underwriters’ internal credit concerns and conflicts) were immaterial as a matter of law or presented fact issues.

## Decision

- The court granted plaintiffs partial summary judgment that certain incorporated WorldCom financial statements were materially false.
- The court denied the underwriters’ motions for summary judgment on the § 11 due-diligence defense, finding triable issues on the reasonableness of their investigation given alleged red flags.
- The court held that reliance on Andersen’s audits and comfort letters did not, by itself, establish a defense as a matter of law, particularly regarding non-expertised and unaudited interim disclosures.
- The court determined that disputes over the materiality of certain omissions and the adequacy of the underwriters’ responses to adverse information were for the factfinder.

## Legal Principles

- Section 11 imposes a demanding investigative obligation on underwriters; the due-diligence defense requires a reasonable investigation and reasonable grounds to believe the statements were true and complete.
- For expertised portions of a registration statement, an underwriter may rely on an expert only absent reason to believe the expert’s opinion is false or misleading.
- For non-expertised portions (including unaudited interim financial information and other incorporated disclosures), underwriters must satisfy an independent reasonable-investigation and reasonable-belief standard.
- Evidence of “red flags” available to an underwriter can defeat summary judgment by creating fact disputes about whether the investigation was reasonable and whether reliance on experts was justified.
- Materiality and omission questions commonly turn on fact-specific inferences and are often inappropriate for resolution on summary judgment when the record permits competing conclusions.

## Conclusion

The court’s summary-judgment rulings limited underwriters’ ability to avoid § 11 exposure through claimed diligence and auditor reliance where the record contained evidence of warning signs and potential investigative gaps, leaving key questions for trial.


In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004)