No. The banks had to do more than just get a letter from the accountant. The judge explained that there are two types of financial numbers. For the big, annually-audited numbers, banks can mostly trust the accountant, but not if there are 'red flags' (like WorldCom's performance looking magically better than all its rivals). If there are red flags, the banks have to investigate. For the more recent, quarterly numbers that only get a quick review from the accountant (in a 'comfort letter'), the banks have a legal duty to do their own 'reasonable investigation.' They have to act like a 'devil's advocate' and ask tough questions to make sure the numbers are real.

The court partly agreed with the main investor group about WorldCom's 2001 bond sale papers being wrong about some costs. It partly agreed with the banks that they didn't have to share some things. Both sides have some issues left for a trial. The court explained banks have to investigate more for one law than another. It also talked about when banks have to share conflicts of interest and if general statements are enough. Banks must look into non-audited parts of official statements and can't just trust audits if there are warning signs. Whether there were warning signs and if the banks investigated enough are for a jury to decide based on the details of the case.

Both before and since the SEC issued its interpretation, other court have held that a reasonable care due diligence defense under Section 12 (a)(2) "is less demanding than the duty of due diligence imposed under Section 11."

—explaining that an underwriter would be entitled to rely on audited financial statements in the absence of red flags

Initially, the Court agrees with Defendants that since the Preferred B class representatives did not purchase their shares from an underwriter who is a defendant in this case, their Section 12 (a)(2) claims against all of the Underwriter Defendants must be dismissed for failure to state a claim.

The various Securities Act defenses are described in the Opinion pertaining to the Underwriter Defendants' summary judgment motion.

—explaining that a premium is paid on a swap contract to the seller for credit default protection, and if the default event does not occur, payer has only lost the premium

N] on-disclosure of an underwriter or issuer's conflicts of interest can constitute material omissions, even where no regulation expressly compels the disclosure of such conflicts

As the Southern District of New York has observed in the context of evaluating several securities claims:[I] n enacting Section 11, "Congress recognized that underwriters occupied a unique position that enabled them to discover and compel disclosure of essential facts about the offering. Congress believed that subjecting underwriters to the liability provisions would …

—underwriters can be liable for false and misleading public filings made by issuer and accountants that were incorporated into registration statement

However, if historical facts "pose [] a serious obstacle to obtaining the requisite regulatory approvals... boilerplate language in the Registration Statement warning investors that the [business opportunity] was subject to regulatory approval [may be] inadequate."

To be liable as a seller, the defendant must be the "buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers

No. An underwriter does not satisfy its due diligence obligations by passively relying on auditors; it must conduct its own reasonable investigation into non-expertised information and cannot ignore red flags concerning expertised information. Section 11 of the Securities Act imposes distinct standards for different parts of a registration statement. For non-expertised portions, such as unaudited interim financial statements, an underwriter must conduct a 'reasonable investigation.' SEC Rule 436 and related commentary make clear that an auditor's comfort letter for such statements is not an 'expert's opinion' on which underwriters can rely; rather, it is one piece of evidence in assessing whether the underwriter's own investigation was reasonable. The court found that the cursory inquiries made by the Underwriter Defendants created a triable issue of fact as to whether their investigation was sufficient. For expertised portions, like audited financial statements, an underwriter has a 'reliance defense' but loses it if they had 'reasonable ground to believe' the statements were untrue. The existence of 'red flags'—such as a significant, unexplained discrepancy between WorldCom's E/R ratio and its competitors'—can create such a reasonable ground for belief, triggering a duty to investigate further. Modern practices like shelf registration and integrated disclosure compress the time for due diligence but do not dilute this fundamental obligation of inquiry and verification.

The Lead Plaintiff's motion is granted in part, specifically regarding WorldCom's 2001 Registration Statement's reporting of line costs. The Underwriter Defendants' motion is granted in part for certain listed omissions. Both parties' motions are denied in part, leaving several issues to be resolved at trial. The court clarified that the underwriters' due diligence defense under Section 12(a)(2) is less demanding than under Section 11. The court also addressed the issue of liability for non-disclosure of conflicts of interest and the adequacy of boilerplate language in the registration statements. Underwriters must conduct a reasonable investigation of the non-expertised portions of a registration statement, including unaudited interim financial statements, and cannot solely rely on audited financial statements or auditor comfort letters without further inquiry if red flags emerge. The existence of red flags and the reasonableness of the underwriters' investigation are questions of fact for the jury.

In re WorldCom, Inc. Securities Litigation

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