This NY Times article reports on an unusual brief that the Securities and Exchange Commission has filed in Citigroup‘s appeal of the class certification order in the WorldCom class action securities fraud case.
This particular appeal involves the “fraud on the market” theory, which is explained in this prior post. In their unusual brief, SEC lawyers argue that analysts such as Citigroup’s Jack B. Grubman do affect the price of a company’s stock and bonds and may be held accountable for misrepresentations they may make. On the other hand, Citigroup is contending that its analysts’ enthusiasm for WorldCom securities is irrelevant, that institutional investors ignore analysts’ reports, and that analysts’ opinions – including those of Mr. Grubman – are simply part of a conglomeration of information and do not have a distinct effect on securities prices. Accordingly, Citigroup lawyers are contending that each individual investor should have to prove that he was harmed by the analysts’ opinions in individual cases, which, if adopted by the appellate court, would effectively scuttle the class action. Oral argument in the appellate court is scheduled for May 10, so stay tuned.