back

Support Global Action on Aging!

Thanks!

Retirement system files suit
State pension plan looks to recoup $38M from WorldCom underwriters

By Betty Adams

Kennebec Journal, May 15, 2003

AUGUSTA — The bankruptcy filing of telecom giant WorldCom has cost the Maine State Retirement System $38 million and the system is looking to recoup much of that money by suing WorldCom's bond underwriters for negligence.

The agency recently filed the lawsuit in Kennebec County Superior Court against 16 corporate defendants, including Citigroup, Salomon Smith Barney, J.P. Morgan Securities, and Arthur Andersen.

Payments from the retirement system, which mails out 30,000 checks each month that total $30 million, will be unaffected. Receiving those payments are retired state employees, retirees who are disabled and others.

"A loss of $38 million, while not small, relative to the assets is not large at all," said Kay R. H. Evans, executive director of the Maine State Retirement System, which lists $6 billion in assets.

"Simple moves of the market can change an investment portfolio of our size that much," said Evans. "It's very important to have perspective."

She said the system provides a variety of benefit plans for recipients.

"The people who are receiving and going to receive in the future do not bear investment risk," Evans said. "So many of our retirees see our name and they think, 'Our check's going to stop.' We try to teach people about their plan. The amount of your benefit does not change."

The pension plan is funded by both the employee and the state.

"In terms of distributing effect of investment return gains or losses, the state bears that risk," she said. "If there was huge investment losses, then the state's contribution rate would rise some years later."

Evans described the system as a "quintessential" long-term investor. "We're investing over a whole series of lifetimes."

She said that method smoothes bond market gains and losses.

However, she said, "There is a loss here, and we believe that the responsibility for the loss can be attributed to the defendant accountants and underwriters."

The state retirement system bought the bonds at various times from 1998 through 2001.

"The lawsuit at bottom talks about the underwriters and the accountants failing in their responsibility to know or disclose what the financial condition of WorldCom was," Evans said.

WorldCom, the second largest telecommunications company in America, filed for bankruptcy in July 2002. Four months later, the federal Securities and Exchange Commission alleged that WorldCom's financial statements had been overstated by $9 billion since 1999, and that registration statements were false and misleading.

Evans said the lawsuit could help to shape changes in the way the underwriting companies are governed.

Because of the complexity of the case and the number of defendants, the retirement system is using the San Diego firm of Milberg Weiss, which is handling similar lawsuits for other large public pension funds, Evans said.

"We've done extensive investigation and work on the case," said Spencer Burkholz, a partner in Milberg Weiss. He said his firm handles more than 50 large public and private pension funds and 25 separate cases naming the banks as defendants. Several were filed days before the WorldCom bankruptcy action. Burkholz said the defendants have removed many of the cases to federal court.

"Right now we're in the procedural aspects of the case," he said.

Jay Kasner of Skadden Arps of New York City has served as lead attorney for the defendant banks in other states. He was unavailable for comment Wednesday on the Maine lawsuit.

Michael Colleran, the assistant attorney general serving as local counsel for the Maine State Retirement System, said the complaint is brought under the federal Securities Act of 1933.

Colleran said the firms backing WorldCom bonds filed investment statements that "contained misrepresentations and falsehoods and those investment banks and Arthur Andersen had a legal duty to make sure the information in the registration statement was correct because that's what investors rely upon. Here they did not fulfill this duty."