WorldCom Employees File Suit Against Morgan Stanley

June 26, 2002
By Stephen Lee
Dow Jones Newswires

A lawsuit was filed against Morgan Stanley alleging the brokerage firm failed to recommend hedging strategies to participants in WorldCom Inc.’s employee stock option plan.

WorldCom’s stock closed Tuesday at 83 cents. The stock traded as high as $ 64.50 in June 1999.

On Tuesday, WorldCom admitted it made a $3.8-billion accounting error due to improperly booked capital expenditures and said it would restate its financial statements for 2001 and the first quarter of 2002 as a result of an internal audit of the company’s capital expenditure accounting.

In a press release Wednesday, the law firm Klayman & Toskes P.A. said it has been hired by large groups of WorldCom employee stock option plan participants claiming damages that already exceed $50 million.

The law firm expects the number of WorldCom employees who have sustained damages to increase substantially. WorldCom has about 80,000 employees.

The lawsuit alleges unlawful conduct at Morgan Stanley’s West Lebanon, N.H., and Middletown, R.I., branch offices. A Morgan Stanley spokesman wasn’t immediately available for comment.

Arbitration claims have previously been brought against Citigroup Inc.’s Salomon Smith Barney Inc. and Merrill Lynch & Co. The suits allege that the firms failed to recommend to participants hedging strategies to protect their concentrated position in WorldCom as a result of the exercise of their stock options through the use of margin. The claims focus on Salomon’s, Merrill’s and Morgan Stanley’s alleged mismanagement of their clients’ portfolios, saying that there were option strategies available at the time of exercise that would have protected the value of the margined, concentrated portfolio, known as a “zero cost” collar.

Earlier Wednesday, WorldCom shareholders filed a lawsuit accusing Salomon Smith Barney and its telecommunications analyst, Jack Grubman, of issuing bullish ratings to generate investment banking business for the firm.

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