UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK : IN RE WORLDCOM, INC. : MASTER FILE NO. SECURITIES LITIGATION : 02 Civ. 3288 (DLC) : This Document Relates to: : 02 Civ. 3288 02 Civ. 4973 02 Civ. 8230 : 02 Civ. 3416 02 Civ. 4990 02 Civ. 8234 : 02 Civ. 3419 02 Civ. 5057 02 Civ. 9513 : 02 Civ. 3508 02 Civ. 5071 02 Civ. 9514 : 02 Civ. 3537 02 Civ. 5087 02 Civ. 9515 : JURY TRIAL DEMANDED 02 Civ. 3647 02 Civ. 5108 02 Civ. 9516 : 02 Civ. 3750 02 Civ. 5224 02 Civ. 9519 : 02 Civ. 3771 02 Civ. 5285 02 Civ. 9521 : 02 Civ. 4719 02 Civ. 8226 03 Civ. 2841 : 02 Civ. 4945 02 Civ. 8227 03 Civ. 3592 : 02 Civ. 4946 02 Civ. 8228 : 02 Civ. 4958 02 Civ. 8229 : : FIRST AMENDED CLASS ACTION COMPLAINT OF LEAD PLAINTIFF ALAN G. HEVESI, COMPTROLLER OF THE STATE OF NEW YORK, AS ADMINISTRATIVE HEAD OF THE NEW YORK STATE AND LOCAL RETIREMENT SYSTEMS AND AS TRUSTEE OF THE NEW YORK STATE COMMON RETIREMENT FUND, ON BEHALF OF PURCHASERS AND ACQUIRERS OF ALL WORLDCOM, INC. PUBLICLY TRADED SECURITIES BERNSTEIN LITOWITZ BERGER BARRACK, RODOS & BACINE & GROSSMANN LLP Leonard Barrack (Pro Hac Vice) Max W. Berger (MB-5010) Gerald J. Rodos (Pro Hac Vice) John P. Coffey (JC-3832) Jeffrey W. Golan (Pro Hac Vice) Steven B. Singer (SS-5212) Jeffrey A. Barrack (Pro Hac Vice) Patricia S. Gillane (PG-1801) Pearlette V. Toussant (Pro Hac Vice) Beata Gocyk-Farber (BGF-5420) 3300 Two Commerce Square Jennifer L. Edlind (JE-9138) 2001 Market Street Joseph A. Fonti (JF-3201) Philadelphia, Pennsylvania 19103 1285 Avenue of the Americas (215) 963-0600 New York, New York 10019 (212) 554-1400 Attorneys for Lead Plaintiff Alan G. Hevesi, Comptroller of the State of New York, as Administrative Head of New York State and Local Retirement Systems and as Trustee of the New York State Common Retirement Fund, and Co-Lead Counsel for the Class TABLE OF CONTENTS Pages NATURE OF ACTION........................................................................................................................i JURISDICTION AND VENUE ....................................................................................................... 12 PARTIES .......................................................................................................................................... 13 Lead Plaintiff................................................................................................................................. 13 Additional Named Plaintiffs ......................................................................................................... 14 Defendants .................................................................................................................................... 15 Related Non-Party......................................................................................................................... 26 CLASS ALLEGATIONS ................................................................................................................. 27 THE BASIS OF THE CLAIMS ....................................................................................................... 30 SUBSTANTIVE ALLEGATIONS .................................................................................................. 31 The Growth of WorldCom Begins to Slow.................................................................................. 31 WorldCom Turns to Outright Fraud ............................................................................................. 33 An Internal Audit Sounds the Whistle .......................................................................................... 42 Post-June 25, 2002 Events ............................................................................................................ 43 WORLDCOM’S FALSE AND MISLEADING STATEMENTS ................................................... 45 False and Misleading Statements Relating to the 1999 First Quarter........................................... 45 False and Misleading Statements Relating to the 1999 Second Quarter ...................................... 47 False and Misleading Statements Relating to the 1999 Third Quarter ......................................... 48 False and Misleading Statements Relating to the 1999 Fourth Quarter and Year........................ 49 False and Misleading Statements Relating to the 2000 First Quarter........................................... 53 False and Misleading Statements Relating to the 2000 Second Quarter ...................................... 54 False and Misleading Statements Relating to the 2000 Third Quarter ......................................... 56 False and Misleading Statements Relating to the 2000 Fourth Quarter and Year........................ 57 False and Misleading Statements Relating to the 2001 First Quarter........................................... 60 False and Misleading Statements Relating to the 2001 Second Quarter ...................................... 62 False and Misleading Statements Relating to the 2001 Third Quarter ......................................... 63 False and Misleading Statements Relating to the 2001 Fourth Quarter and Year........................ 65 False and Misleading Statements Relating to the 2002 First Quarter........................................... 69 The False and Misleading Registration Statements (Notes) ......................................................... 71 A. The May 2000 Offering .................................................................................................... 71 B. The May 2001 Offering .................................................................................................... 78 The False and Misleading Registration Statements Issued in Connection with WorldCom Acquisitions .................................................................................................................................. 87 A. The SkyTel Acquisition.................................................................................................... 87 B. The Intermedia Acquisition.............................................................................................. 88 THE NEFARIOUS RELATIONSHIP BETWEEN SALOMON AND WORLDCOM.................. 89 The Investment Banking Business According to Salomon........................................................... 89 The Initial Public Offering Process............................................................................................... 90 Salomon’s Allocation of Hot IPO Shares ..................................................................................... 91 Salomon’s “Independent” Research Department.......................................................................... 95 The Grubman Factor ..................................................................................................................... 97 i GRUBMAN’S MATERIALLY FALSE AND MISLEADING ANALYST REPORTS............... 107 OTHER ELEMENTS OF THE SECRET RELATIONSHIP BETWEEN SALOMON AND EBBERS ........................................................................................................... 122 Grubman Alters His Analysis Methodology to Obscure WorldCom’s Growing Cash Flow Problems ................................................................................... 122 The Secret Travelers Loans and Travelers’ Business Partnership With Ebbers........ 129 Grubman’s Finder’s Fees and Commissions ............................................................. 139 Sullivan Demands Greater Shares of IPO Allocations and Salomon and Ebbers Willingly Comply .................................................................................. 139 ADDITIONAL FACTS REGARDING SCIENTER OF CERTAIN DEFENDANTS .................. 141 Ebbers.......................................................................................................................................... 141 Sullivan....................................................................................................................................... 149 Myers and Yates.......................................................................................................................... 150 Kellett.......................................................................................................................................... 150 The Audit Committee.................................................................................................................. 151 1. The Committee’s Mission....................................................................................... 154 2. The Audit Committee’s Failure to Fulfill its Responsibilities Allowed the Fraud to Go Undetected ..................................................................... 155 Andersen..................................................................................................................................... 168 ADDITIONAL FACTS REGARDING FAILURE OF THE UNDERWRITER DEFENDANTS TO CONDUCT ADEQUATE DUE DILIGENCE ............................................. 176 The Underwriter Defendants....................................................................................................... 176 WORLDCOM’S VIOLATIONS OF GAAP .................................................................................. 184 WorldCom’s Improper Reduction of Reserves........................................................................... 184 WorldCom’s Improper Capitalization of Expenses.................................................................... 185 WorldCom’s Excessive Acquisition Write-offs ........................................................................