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High court declines to hear WorldCom lawsuit

/ Source: The Associated Press

The Supreme Court let stand a lower ruling Monday that said the California Public Employees' Retirement System must proceed with its securities fraud lawsuit on behalf of WorldCom Inc. bondholders in federal, rather than state, court.

At issue were two federal statutes, which disagreed on which court should hear the litigation after the telecom giant announced major accounting problems in 2002. The 2nd U.S. Circuit Court of Appeals ruled that the lawsuit belongs in federal court to the extent it is "related to" a bankruptcy case.

As a result, Calpers' suit was consolidated with separate class-action filings in federal court in New York against WorldCom, its officers, bond underwriters, directors, accountants and research analysts by investors who lost billions when WorldCom went under in a multibillion-dollar accounting scandal.

The Supreme Court's move Monday is a defeat for Calpers, although the pension fund may still seek to argue that its claims aren't related to bankruptcy. Calpers wants to pursue bondholder-loss claims in plaintiff-friendly state courts, which generally have a lower standard of proof for securities fraud claims.

Last week, 10 former WorldCom board members agreed to pay $54 million _ $18 million out of their own pocket _ to settle their portion of a lawsuit brought over the company's collapse. WorldCom is now known as MCI Inc.

The ruling came a day after an attorney for Alabama's pension system announced a settlement in the fund's suit against Bear Stearns Cos. that had deadlocked a Montgomery jury in November.

The case was set for retrial Monday, but Retirement Systems of Alabama general counsel William Stephens told The Wall Street Journal, "The case has been resolved." He declined to give details.

The pension fund sought $16.2 million from Bear Stearns to recoup losses stemming from the WorldCom bankruptcy.

The pension fund maintained that the New York investment firm knew about, but did not disclose, financial concerns at the telecommunications company when Bear Stearns sold WorldCom bonds to RSA in October 2001. Attorneys for Bear Stearns argued that the securities firm made public everything it knew.

WorldCom filed for bankruptcy in July 2002, citing massive accounting irregularities that allowed the company to claim a profit when it was losing money. RSA sued two former WorldCom executives, four investment firms, and WorldCom's accountant, blaming them for $124.7 million in losses from WorldCom securities.

WorldCom emerged from bankruptcy last year and now operates under the name MCI Inc. in Ashburn, Va.

The Supreme Court case is California Public Employees' Retirement System v. Ebbers, 04-366.