Defendants responsible for more than $150
million in state pension losses
- Governor James E. McGreevey, Attorney General David Samson and State
Treasurer John McCormac today announced that they are filing four lawsuits
against corporate defendants responsible for more than $150 million in
State pension system losses: Qwest Communications Inc.; Electronic Data
Systems Corporation (EDS); Sears Roebuck and Co.; and Tyco International
The lawsuits, which will be filed within the next two days, seek to recoup
enormous losses that allegedly resulted from misconduct by the defendants
and certain of their corporate officers. The State has retained outside
counsel to handle these securities fraud cases.
"We must hold these corporations accountable and protect the interests of
New Jersey taxpayers and pension members," said Governor McGreevey. "These
lawsuits will send a powerful message to corporate leaders, on behalf of
all investors, that those who commit securities fraud
will face the consequences. Our citizens work hard for their money. We
will defend their financial interests, just as we are defending the
integrity of the State's investment process."
Attorney General Samson said additional cases related to losses to the
State's investment portfolio will be filed soon with the assistance of
"We have lined up some of the best attorneys in this specialized and
highly technical area of securities litigation practice to recoup these
huge pension losses, which in many instances are directly attributable to
corporate mismanagement, misconduct and greed," said Attorney General
Samson. "The selection of these legal teams followed an exhaustive review
process that looked closely at comprehensive statements of qualifications
submitted by interested law firms. These experts will enable us to pursue
all legal avenues to make those responsible pay."
"We have a moral and fiduciary obligation to take every step necessary to
safeguard the integrity of New Jersey's pension investment portfolio,"
said Treasurer John E. McCormac. "We look forward to taking aggressive
actions against malfeasance on behalf of the hundreds of
thousands of present and future beneficiaries of the pension system and
the taxpayers of New Jersey."
Attorney General Samson has retained former Superior Court Judge C. Judson
Hamlin to act as the Special Master and coordinator of the litigation on
his behalf. Judge Hamlin formerly served as Middlesex County Prosecutor,
Chancery Judge for Middlesex County and Presiding Judge for the Middlesex
County Civil Division. He has previously been selected by state and
judges to manage large cases, including national class action litigation.
Judge Hamlin has been assisting in the evaluation of the culpability of
the various entities and individuals responsible for losses to the New
Jersey pension funds and is making recommendations to Samson and Division
of Law Director Douglas K. Wolfson as to the claims to be filed. In
addition, as to those suits authorized to be filed by the Attorney
General's Office, he has independently reviewed the statements of
qualifications submitted by law firms and has made recommendations to the
Attorney General's Office regarding what law firms should be selected for
particular cases. His evaluation has included efforts to avoid conflicts
of interest and to recommend contingent fee arrangements that have been
customized for each case based on the type of case, its complexity, the
prospect of recovery and the current standards in the region of the
country in which the case is to be brought. All of the cases will be
handled on a contingent fee basis, and the firms will be responsible for
all up-front costs.
The State will file a lawsuit against Qwest, certain of its principal
officers, and its accountants, Arthur Andersen. The suit will allege that
the defendants engaged in fraud, malicious misrepresentation, negligent
misrepresentation, securities fraud in breach of New Jersey's Blue Sky
laws and breach of fiduciary duty. More specifically, the complaint will
allege that defendants failed to disclose billions of dollars of
off-balance sheet debt generated by swap transactions, and that certain
Qwest executives engaged in insider trading. A swap is a transaction in
which Qwest sold capacity on its optical telecommunications network to
another carrier, while at the same time buying a nearly identical amount
from the other carrier. The complaint will allege that Qwest recognized
the revenue from the sale but booked the corresponding purchase as capital
expense rather than an operating cost. This accounting practice is alleged
to have improperly inflated Qwest's reported revenues.
The State will file papers seeking to be named as lead plaintiff in two
actions against EDS pending in federal courts in New York and Texas. The
defendants are EDS, its chairman, its chief executive officer and its
chief financial officer. New Jersey's action arises out of purchases of
EDS stock by the New Jersey pension system between September 1999 and
September 2000. In September 2002, EDS announced that its earnings would
fall short of its prior projections by 80 percent. The action alleges that
the earnings shortfall may have resulted from improper revenue recognition
practices in violation of generally accepted accounting practices.
SEARS ROEBUCK & CO.
The State will file a securities class action against Sears Roebuck & Co.
and certain of its officers and directors. The complaint will allege that
the defendants violated federal securities laws by issuing a series of
materially false and misleading statements to the market between January
17, 2002 and October 17, 2002. During that time, the New Jersey pension
system acquired more than 500,000 shares of Sears stock. The State will
seek to have this case consolidated with lawsuits currently pending in
federal district court in Illinois alleging that Sears' materially false
statements resulted in overstating revenues and income on its financial
statements, thereby artificially inflating the value of its stock. New
Jersey will apply for lead plaintiff status.
The State will file suit against Tyco, certain of its current and former
executives - including former CEO L. Dennis Kozlowski, former CFO Mark
Swartz and former General Counsel Mark Belnick - and its accountants, KPMG
LLP. Kozlowski, Swartz and Belnick have been charged by the U.S.
Securities and Exchange Commission with securities fraud for failing to
disclose millions of dollars of personal loan benefits received from Tyco
and improper, lucrative insider trades of Tyco. The lawsuit will allege
that the pension funds have sustained losses as a result of widespread
fraud and accounting improprieties at Tyco.