Bear Stearns Inc. publicly praised WorldCom Inc. stock while its analysts and investment bankers exchanged e-mails about the company's financial problems, court papers filed in an investors' lawsuit show.
E-mails were attached to a request by plaintiffs' lawyer Michael Rediker that Bear Stearns be barred from saying that a "Chinese wall" existed between its promotion-oriented sales side and its analysts. The e-mails show that the bank knew WorldCom was in financial trouble yet at the same time sold bonds to finance a WorldCom merger with Intermedia Communications Inc., Rediker said in the court papers.
"The standalone margins at WorldCom are very deceptive," research analyst William Deatherage wrote to Bear Stearns investment bankers, including managing director Gerald Dorros, in an e-mail submitted to the court hearing the suit in Montgomery, Ala. "The company is very cash flow negative."
Bear Stearns was Intermedia's financial adviser during its 2001 acquisition by WorldCom. When Bear Stearns hired former New York Jets quarterback Richard Todd to sell Intermedia-WorldCom bonds, Bear Stearns employees referred to Intermedia's "worthless" core assets that WorldCom booked as $5 billion in goodwill, Rediker said. At the same time, Bear Stearns issued "buy" recommendations on WorldCom securities, Rediker said.
"The large issue was Deatherage knew WorldCom was lying about its earnings," Rediker said.
The trial against Bear Stearns is scheduled to start Nov. 8. The lawsuit was filed by the Retirement Systems of Alabama, a group of state employee pension funds with WorldCom stock, after the second-largest U.S. long-distance company filed for Chapter 11 bankruptcy protection in July 2002. The pension plan, which represents state employees, is seeking $15 million in damages from Bear Stearns.
"The purpose of a Chinese wall is to prohibit investment bankers from disclosing non-public information they learn in the course of their representation of clients in various transactions," Inge Selden, a lawyer for Bear Stearns, wrote in court papers. Because the information flow is from research analysts to investment bankers and not the other way around, the e-mails "do not violate -- or even implicate -- the Chinese wall," she said.
Selden asked Montgomery County Circuit Judge Charles Price to prohibit the retirement system from using the e-mails as evidence, claiming, among other things, that the messages are inadmissible hearsay.
Rediker said that because Deatherage is listed in court papers as a witness, his work product can be shown to a jury.
WorldCom, which disclosed $11 billion in accounting misstatements, lost $200 billion in value from its share-price high before seeking bankruptcy court protection. The Ashburn-based company emerged from Chapter 11 in April as MCI Inc.