Supreme Court Allows CalPERS Suit to Remain in Federal Court

The U.S. Supreme Court on Monday let stand a ruling that said the California Public Employees’ Retirement System must proceed with its securities fraud lawsuit on behalf of WorldCom Inc. bondholders in federal rather than state court.

At issue were two federal statutes, which disagreed on which court should hear the litigation after the telecom giant announced major accounting problems in 2002. The U.S. 2nd Circuit Court of Appeals ruled that the lawsuit belongs in federal court to the extent it was “related to” a bankruptcy case.

As a result, CalPERS’ suit was consolidated with separate class-action filings in federal court in New York against WorldCom, its officers, bond underwriters, directors, accountants and research analysts by investors who lost billions when WorldCom sought bankruptcy protection after a multibillion-dollar accounting scandal.

The Supreme Court’s move Monday is a defeat for CalPERS, although the pension fund may still seek to argue that its claims are not related to the bankruptcy filing by WorldCom, now known as MCI Inc. CalPERS wants to pursue bondholder-loss claims in plaintiff-friendly state courts, which generally have a lower standard of proof for securities fraud claims.

Last week, 10 former WorldCom board members agreed to pay $54 million -- $18 million out of their own pockets -- to settle their portion of a lawsuit brought over the company’s collapse.

WorldCom filed for bankruptcy protection in July 2002, citing massive accounting irregularities that allowed the company to claim a profit when it was losing money. WorldCom emerged from bankruptcy last year and now operates as MCI. It is based in Ashburn, Va.