## Facts

- WorldCom announced a major restatement of its financial statements in June 2002 and later entered bankruptcy after disclosure of accounting fraud.
- Investors brought a securities class action alleging material misstatements and omissions in registration statements used in offerings.
- Bert C. Roberts, Jr., a former MCI executive and then chairman of WorldCom’s board, signed registration statements that incorporated audited and unaudited financial statements.
- Investors asserted a claim under § 11 of the Securities Act of 1933 based on materially false or misleading statements in those registration statements.
- Roberts moved for summary judgment on the § 11 claim, asserting the statutory due-diligence affirmative defense and arguing his reliance on internal finance personnel and outside auditors was reasonable.
- Investors conceded Roberts lacked actual knowledge of falsity but argued his investigation was inadequate, especially as to unaudited financials, and that he failed to act on warning signs about WorldCom’s financial condition.

## Issues

1. Whether a director who signed registration statements established the § 11 due-diligence defense as a matter of law based on reliance on accounting and auditing professionals.
2. Whether alleged “red flags” created a triable issue on the reasonableness of the director’s investigation and reliance.
3. Whether due diligence is harder to prove at summary judgment for unaudited financial information incorporated into a registration statement.

## Decision

- The court denied Roberts’s motion for summary judgment on the § 11 claim.
- The court held the record contained genuine disputes of material fact on whether Roberts conducted a reasonable investigation and had reasonable grounds to believe the registration statements were accurate.
- The court concluded that reliance on experts was not dispositive, particularly where evidence could support a finding that Roberts failed to respond to warning signs.
- The court determined that, as to unaudited financial statements, the evidentiary record did not compel a finding of due diligence in Roberts’s favor at the summary-judgment stage.

## Legal Principles

- Under § 11, a non-issuer defendant may avoid liability only by proving a due-diligence defense: a reasonable investigation and reasonable grounds to believe (and actual belief) that the registration statement was true and not misleading.
- Reasonable reliance on experts may support due diligence but does not automatically establish it; the inquiry depends on the surrounding circumstances and the steps actually taken by the director.
- Evidence of “red flags” can defeat summary judgment by creating a triable issue as to whether a director should have pursued further inquiry before signing a registration statement.
- On summary judgment, disputed facts about what the director knew or should have learned through reasonable investigation must be resolved by the factfinder, not the court.

## Conclusion

The court refused to grant summary judgment to a board chairman who signed registration statements because a factfinder could conclude that, despite professional assurances, he did not conduct a reasonable investigation or respond adequately to warning signs, defeating the § 11 due-diligence defense at the Rule 56 stage.


In re WorldCom, Inc. Securities Litigation, No. 02 Civ. 3288 (DLC), 2005 WL 638268 (S.D.N.Y. Mar. 21, 2005)