Free Brief in Opposition to Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 01-cv-1451-REB-CBS (consolidated with Civil Action Nos. 01-RB-1472, 01-RB-1527, 01-RB-1616, 01-RB1799, 01-RB-1930, 01-RB-2083, 02-RB-0333, 02-RB-0374, 02-RB-0507, 02-RB-0658, 04-RB-0238, and 02-RB-755) In re QWEST COMMUNICATIONS INTERNATIONAL, INC. SECURITIES LITIGATION

ARTHUR ANDERSEN LLP'S OPPOSITION TO LEAD PLAINTIFFS' MOTION FOR CLASS CERTIFICATION

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TABLE OF CONTENTS Page INTRODUCTION ...............................................................................................................1 I. The Proposed Class Does Not Satisfy the Commonality, Typicality, or Adequacy Standards for Elements of Reliance, Materiality, Loss Causation, and Damages........................................................................................3 A. The Class Is Riddled with Internal Conflicts That Will Require Inconsistent Proof at Trial and Make the Proceeding Unmanageable .............................................................................................4 Example 1. The Conflict Between Purchasers Before and After the March 17, 2000 Audit Opinion Was Issued..................................6 Example 2. The Conflict Between Purchasers Before and After the March 16, 2001 Audit Opinion .....................................................8 Example 3. Conflicts Between Purchasers Before and After the June 20, 2001 Morgan Stanley Report ..............................................9 Example 4. Conflicts Between Purchasers Before and After June 30, 2000 and Between Classic Qwest and Classic U.S. West Purchasers ........................................................................................12 Example 5. The Conflicts Arising From Developments in the Relevant Accounting Literature..........................................................13 Example 6. The Conflict Between Equity and Debt Security Owners ..............................................................................................14 II. Predominance of Common Questions, Superiority and Manageability Problems.................................................................................................................16

Conclusion .........................................................................................................................18

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TABLE OF AUTHORITIES CASES Pages

Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997) ..............................................................................5, 6, 17,18 Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996) ..........................................................................6, 7 Arst v. Stifel, Nicolaus & Co. Inc., 86 F.3d 973 (10th Cir. 1996) ............................................................................6, 7 Bell Atlantic Corp. v. AT&T Corp., 339 F.3d 294 (5th Cir. 2003) ..............................................................................17 Brosious v. Children's Place Retail Stores, 189 F.R.D. 138 (D.N.J. 1999) ...............................................................................4 Califano v. Yamasaki, 442 U.S. 682 (1979) .............................................................................................3 Central Bank of Denver v. First Interstate Bank of Denver 511 U.S. 164 (1994) ...........................................................................6, 7 Cohen v. Uniroyal, Inc., 77 F.R.D. 685 (E.D. Pa. 1977) ...........................................................................10 Gariety v. Grant Thornton LLP, 368 F.3d 356 (4th Cir. 2004) ................................................................................3 Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147 (1982) .............................................................................................3 In re Ames Dep't Stores, Inc. Note Litig., 991 F.2d 968 (2d Cir. 1993) ...............................................................................14 In re Data Access Sys. Sec. Litig., 103 F.R.D. 130 (D.N.J. 1984) ..........................................................................9,10 In re Ford Motor Co. Ignition Switch Products Liability Litigation, 174 F.R.D. 332 (D.N.J. 1997) .............................................................................17

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In re Intelcom Group, Inc., Sec. Litig., 169 F.R.D. 142 (D. Colo. 1996).............................................................................5 In re Qwest Sav. & Inv. Plan ERISA Litig., No. 02-RB-464, 2004 U.S. Dist. LEXIS 24693 (D. Colo. Sept. 24, 2004) ......................................6 In re Ribozyme Pharms., Inc. Sec. Litig., 205 F.R.D. 572 (D. Colo. 2001) ..............................................................3, 5, 9, 11 J.B. ex rel. Hart v. Valdez, 186 F.3d 1280 (10th Cir. 1999) ............................................................................3 Kerns v. Spectralink Corp., No. 02-D-263, consolidated with No. 02-D-315, 2003 U.S. Dist. LEXIS 11711 (D. Colo. July 1, 2003) ....................5 Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987) ..........................................................................4, 5 Kusner v. First Pa. Corp., 531 F.2d 1234 (3d Cir. 1976) .............................................................................16 Lerner v. Haimsohn, 126 F.R.D. 64 (D. Colo. 1989) ..............................................................................5 Levine v. NL Industries, 720 F. Supp. 305 (S.D.N.Y. 1989), aff'd, 926 F.2d 199 (2d Cir. 1991) ........................................................................8 Mitchell v. Tex. Gulf Sulphur Co., 446 F.2d 90 (10th Cir. 1971) ................................................................................9 O'Neil v. Appel, 165 F.R.D. 479 (W.D. Mich. 1996) .......................................................................7 Queen Uno Ltd. P'ship v. Coeur D'alene Mines Corp., 183 F.R.D. 687 (D. Colo. 1998) ............................................................................5 Reed v. Bowen, 849 F.2d 1307 (10th Cir. 1988) ............................................................................3 Schwartz v. Celestial Seasonings, 178 F.R.D. 545 (D. Colo. 1998) ........................................................................4, 5 Shook v. El Paso, 386 F.3d 963 (10th Cir. 2004) ..............................................................................3 - ii -

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Simon v. Merrill Lynch Pierce, Fenner & Smith, Inc. 482 F.2d 880 (5th Cir. 1973) .................................................................................5 Westinghouse Credit Corp. v. Bader & Duffy, 627 F.2d 221 (10th Cir. 1980) .................7 Zimmerman v. Bell, 800 F.2d 386 (4th Cir. 1986) ..............................................................................17 Zucker v. Sasaki, 963 F. Supp. 301 (S.D.N.Y. 1997) .......................................................................7

STATUTES Fed. R. Civ. P. 23 ...........................................................................................................3 Fed. R. Civ. P. 23(a) .......................................................................................................2 Fed. R. Civ. P. 23(b) .....................................................................................................16 Fed. R. Civ. P. 23(b)(3) ...................................................................................................2

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INTRODUCTION After several months of discovery, it is now clear that the class proposed by Lead Plaintiffs contains fundamentally divergent groups of purchasers of Qwest equity and debt securities with a myriad of conflicting interests that will make proof at trial regarding issues of reliance, loss causation, materiality, and damages so cumbersome and confusing that class certification is not appropriate. As Lead Plaintiffs' Motion for Class Certification ("Mot.") confirms, the class contains members with competing interests based on when they purchased Qwest securities and the types of securities purchased. These conflicts will lead to a trial presentation that is at best incoherent and, at worst, will deprive the defendants of a fair hearing on the charges against them by hopelessly confusing the jury. These conflicts flow from the huge time span of the proposed class ­ almost a full thirty-three months ­ from May 24, 1999 to February 14, 2002. The conflicts are evident when one considers the ramifications of such a vast class. For example, the class contains members who purchased their Qwest equities both:

· before and after Andersen became Qwest's independent auditor in June
1999;

· before and after Andersen issued its first purportedly misleading audit opinion
on March 17, 2000;

· before and after the entity known as Qwest merged with U.S. West and
adopted all of U.S. West's financial systems and statements on June 30, 2000;

· before and after market analysts began raising questions about Qwest's
accounting practices on June 20, 2001; and

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· before and during the period for which Qwest has restated its financial
statements. As described herein, these break-points (as well as the others described in this brief) pose real and serious conflicts for presenting a coherent theory of the case at trial. And these are only conflicts among equity holders. The class also reflects a fundamental conflict between equity holders and holders of debt securities. As discussed herein, bond holders cannot prove loss causation during the class period because there was no loss in bond value during the class period. Accordingly, the events bond holders would need to emphasize to establish legally cognizable injury are completely different from those that equity holders would need to establish. Moreover, as Qwest notes in its opposition, which Andersen fully adopts and incorporates herein by reference, none of the proposed class members purchased Qwest debt securities. For the reasons described herein, the proposed class does not meet the typicality, commonality, or adequacy requirements of Federal Rule of Civil Procedure 23(a) or the predominance, manageability or superiority requirements of Rule 23(b)(3). Class treatment of this action is therefore inappropriate, and the Court should deny Plaintiffs' Motion for Class Certification.

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I.

The Proposed Class Does Not Satisfy the Commonality, Typicality,1 or Adequacy Standards for Elements of Reliance, Materiality, Loss Causation, and Damages A class action is an "exception to the usual rule that litigation is conducted by and

on behalf of the individual named parties only." Califano v. Yamasaki, 442 U.S. 682, 700-01 (1979). Accordingly, a decision to grant certification requires a "rigorous analysis." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 161 (1982); Shook v. El Paso, 386 F.3d 963, 968 (10th Cir. 2004) (citation omitted); J.B. ex rel. Hart v. Valdez, 186 F.3d 1280 (10th Cir. 1999); Reed v. Bowen, 849 F.2d 1307, 1309 (10th Cir. 1988) (citation omitted). Plaintiffs, as the parties "invoking Rule 23 [have] the burden of showing that all of the prerequisites to utilizing the class action procedure have been satisfied." In re Ribozyme Pharms., Inc. Sec. Litig., 205 F.R.D. 572, 577 (D. Colo. 2001) (citation omitted). We focus on the elements that clearly do not satisfy Rule 23. "In determining whether the requirements of Rule 23 have been met," courts in this Circuit have held that "it is often necessary to analyze the substantive claims and defenses of the parties and the essential elements of those claims and defenses." In re Ribozyme, 205 F.R.D. at 577 (citation omitted). "The factors spelled out in Rule 23 must be addressed through findings, even if they overlap with issues on the merits." Gariety v. Grant Thornton LLP, 368 F.3d 356 (4th Cir. 2004).

1

As more fully set forth in Qwest's Opposition, none of the Lead Plaintiffs is typical of the class as a whole because each Lead Plaintiff is subject to unique defenses with respect to Plaintiffs' fraud-on-the-market theory. Moreover, as stated above, while the putative class consists of purchasers of Qwest bonds, no Lead Plaintiff purchased any Qwest bonds, and hence none of the Lead Plaintiffs has standing to assert claims on behalf of class members who purchased Qwest bonds.

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A.

The Class Is Riddled with Internal Conflicts That Will Require Inconsistent Proof at Trial and Make the Proceeding Unmanageable

As defined by Plaintiffs, the class in this case is a composite of all persons and entities who purchased Qwest securities ­ stock and bonds ­ from May 24, 1999 to February 14, 2002, a thirty-three month period encompassing 703 trading days, during which Qwest stock price was highly volatile. Indeed, as Plaintiffs point out, Qwest stock price ranged from a high of $57.00 to a low of $7.49 during the proposed class period, interspersed by intervening up-and down-movements of the stock price. See Fifth Consolidated Amended Class Action Complaint ("Compl.") at ¶¶ 7-26. As Plaintiffs also allege, the volatility of Qwest stock was driven by a constantly changing mix of information, ranging from authorized press releases, reports by securities analysts, and financial journalists, that vary in content and effect throughout the class period and had nothing to do with Andersen's audit opinions. Compl. ¶¶ 226-227, 238, 243-44, 249-51. Thus, this is not a typical securities fraud case where a discrete piece of "bad news" is alleged to have been wrongfully withheld by a company while its stock price climbed.2 Compare Brosious v. Children's Place Retail Stores, 189 F.R.D. 138, 147 (D.N.J. 1999) ("[e]ach class member seeks to prove the same falsities, in the same documents, with the same resultant damages") with Kirkpatrick v. J.C. Bradford & Co.,

2

Indeed, Plaintiffs devote eighty-seven pages of their 203 page Complaint exclusively to listing countless alleged misleading statements by Qwest and other defendants purportedly designed to conceal "bad news" about Qwest's business affairs and accounting practices. Thus, this case is unlike the securities class cases decided by this Circuit, such as Schwartz v. Celestial Seasonings, 178 F.R.D 545 (D. Colo. 1998), on which Lead Plaintiffs rely in support of their Motion. See id. (involving allegations of misleading statements in only two prospectuses).

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827 F.2d 718, 724 (11th Cir. 1987) ("[i]f there is any material variation in the representations made or degrees of reliance thereupon, a fraud case may be unsuited for treatment as a class action") (quoting Simon v. Merrill Lynch Pierce, Fenner & Smith, Inc., 482 F.2d 880, 883 (5th Cir. 1973)). Moreover, the Supreme Court's warning in Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 592, 629 (1997), against the growing "enthusiastic[ ]" and "adventuresome" use of the class action device is particularly applicable here, and cautions against certification of a class spanning a period as long as the one proposed by Plaintiffs. Indeed, post-Amchem securities classes in this Circuit on which Plaintiffs rely in support of the Motion for Class Certification have tended to be much shorter ­ averaging less than 12 months ­ than the class period Plaintiffs proposed.3 While the sheer length of the class period and the number of securities aggregated together would not necessarily preclude class certification, a careful examination of the conflicts presented by so broad a class makes clear that trial would be impractical. In this section, we provide six illustrations demonstrating why the interests of different class members are likely to diverge at trial on this matter, placing

3

See, e.g., Kerns v. Spectralink Corp., No. 02-D-263, consolidated with No. 02-D-315, 2003 U.S. Dist. LEXIS 11711 (D. Colo. July 1, 2003) (9-month class period); In re Ribozyme, 205 F.R.D. at 581 (one-day class period); Queen Uno Ltd. P'ship v. Coeur D'alene Mines Corp., 183 F.R.D. 687, 695 (D. Colo. 1998) (18-month class period); Celestial Seasonings, 178 F.R.D. at 562 (10-month class period). Even pre-Amchem cases from this Circuit, on which Plaintiffs rely, contain class periods far shorter than the one proposed by Plaintiffs. See, e.g., Lerner v. Haimsohn, 126 F.R.D. 64 (D. Colo. 1989) (13-month class period); In re Intelcom Group, Inc., Sec. Litig., 169 F.R.D. 142 (D. Colo. 1996) (12-month class period).

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counsel in the untenable position of having to emphasize one subgroup's legal strategy over another's. These examples are only illustrative of the kinds of problems endemic in certifying a class as broad as the one proposed here, encompassing members whose "interests . . . are not aligned" or "sufficiently cohesive to warrant adjudication by representation." Amchem, 521 U.S. at 623-26. Example 1. The Conflict Between Purchasers Before and After the March 17, 2000 Audit Opinion Was Issued: The plaintiffs proposed class definition is "overly broad because it seems to include [class members] who could not have been harmed by [Andersen's] alleged [ ] breaches" of the Federal securities laws. In re Qwest Sav. & Inv. Plan ERISA Litig., No. 02-RB-464, 2004 U.S. Dist. Lexis 24693 , at *10 (D. Colo. Sept. 24, 2004) (denying class certification). To state a claim for securities fraud against Andersen, Plaintiffs must prove that Andersen actually made an untrue statement of material fact and that Plaintiffs sustained damages as a proximate result of their reliance on this misrepresentation. Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1225 (10th Cir. 1996) (citing Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994)). In other words, Plaintiffs must not only prove that Andersen made a materially misleading statement, or engaged in deceptive conduct, they must also establish "a causal connection between the allegedly deceptive act or omission and the alleged injury." Arst v. Stifel, Nicolaus & Co. Inc., 86 F.3d 973, 977 (10th Cir. 1996) (citing Westinghouse Credit Corp. v. Bader & Dufty, 627 F.2d 221, 223 (10th Cir. 1980)). The proposed class contains members who simply cannot meet this

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burden because Andersen's allegedly misleading statements or conduct "occurred after" they purchased Qwest securities. Arst, 86 F.3d at 977 (emphasis in original). See also Zucker v. Sasaki, 963 F. Supp. 301, 306 (S.D.N.Y. 1997) ("Allegedly false statements made [by auditor] after the named plaintiff's last stock purchase are not actionable because the plaintiff could not possibly have relied on such statements in purchasing the stock.") (emphasis added). As noted above, Plaintiffs purport to represent a class of all persons who purchased Qwest publicly traded securities from May 24, 1999 through February 14, 2002. Notably, this class includes individuals who purchased Qwest securities before Andersen became Qwest's independent auditor, as well as individuals who purchased Qwest securities before Andersen issued its first audit opinion. The earliest possible statement by Andersen on which members of the proposed class can rely within the meaning of Anixter and Central Bank of Denver is Andersen's audit opinion certifying Qwest's 1999 financial statements. That opinion was not released to the public until March 17, 2000. As such, Andersen's "allegedly deceptive conduct could not have had an impact on [class members'] decision[s] to" purchase Qwest shares before March 17, 2000. Arst, 86 F.3d at 977. "Consequently, it is patent that no class can be certified in this case with regard to [Andersen] containing members whose only purchase of [Qwest] stock predated" March 17, 2000. O'Neil v. Appel, 165 F.R.D. 479, 488 (W.D. Mich. 1996) (ruling that plaintiffs who purchased securities before accounting firm issued allegedly misleading statement could not be included in class).

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See also Levine v. NL Industries, 720 F. Supp. 305, 308 (S.D.N.Y. 1989), aff'd, 926 F.2d 199 (2d Cir. 1991) ("The last five of these representations were made after Levine had purchased his stock. Thus, these representations are not actionable . . . by a class represented by Levine.") (emphasis added). Even were this Court to hold that class members who purchased Qwest securities before March 17, 2000 could state a securities fraud claim against Andersen, pre-March 17, 2000 purchasers would likely pursue a very different case at trial than post-March 17, 2000 purchasers regarding the significance of Andersen's audit opinion. The post-March 17, 2000 purchasers will want to emphasize the importance of Andersen's audit in arguing the proximate relationship between Andersen's March 17, 2000 statement and their purported loss. In contrast, pre-March 17, 2000 purchasers, who can cite to no statement by Andersen, would want to downplay the importance of Andersen's audit opinion (and Andersen's alleged role) in the purported fraud. Because these investors can cite to no statement by Andersen, why would they authorize their attorneys to present complicated proof about auditing standards and the significance of the audit opinion that would significantly complicate trial presentation and run the risk of confusing the jury? They would not. But because the post-March 17, 2000 purchasers would need to present such evidence, there is a direct conflict. Example 2. The Conflict Between Purchasers Before and After the March 16, 2001 Audit Opinion: The evidence in this case establishes that while Qwest has restated its financial statements for 2000 (released to the public on March 16, 2001), it

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did not restate its financial statements for 1999. Class members who purchased following the issuance of Andersen's 2000 audit opinion (i.e., after March 16, 2001) would most likely want to emphasize Qwest's restatement in presenting their case. Indeed, in their Complaint, Lead Plaintiffs emphasize the fact that "Qwest [ ] admitted that it issued materially false and misleading financial statements." See Compl. ¶¶ 2932. Because Qwest has not restated financial statements prior to its year-end 2000 statements, however, Class members who purchased prior to this time cannot cite to a restatement; placing undue emphasis on the significance of a restatement may suggest to the jury that their case is materially weaker than those of later purchasers ­ it may even be detrimental to their case. How can one set of lawyers put on a coherent presentation of the significance of a restatement at trial consistent with their obligations to class members who have fundamentally different interests in explaining to a jury what the significance of a restatement is? They cannot. Hence, another direct conflict. Example 3. Conflicts Between Purchasers Before and After the June 20, 2001 Morgan Stanley Report : "At some point in time after the publication of a curative statement," securities purchasers "should no longer be able to claim reliance on [an alleged] deceptive" statement or conduct. Mitchell v. Tex. Gulf Sulphur Co., 446 F.2d 90, 103 (10th Cir. 1971). Thus, "[i]n a securities class action based on material misrepresentations and omissions to the investing public, the class period should end when curative information is publicly announced or otherwise effectively disseminated to the market." In re Ribozyme, 205 F.R.D. at 579. See also In re Data Access Sys. Sec.

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Litig., 103 F.R.D. 130, 143-44 (D.N.J. 1984); Cohen v. Uniroyal, Inc., 77 F.R.D. 685, 688, 696 (E.D. Pa. 1977) (ending class period on date when "many of the material facts which form the gravamen of this complaint were disclosed to the public for the first time in an article about [company] which appeared in Forbes Magazine"). The class definition proposed by Plaintiffs is over-inclusive, as it includes members who purchased after the market received corrective information about Qwest's purported accounting improprieties. These putative class members cannot establish any reliance on Qwest's alleged misleading accounting practices, nor prove damages proximately resulting from such practices. Indeed, the Complaint itself points to instances when investment analysts and financial journalists disseminated corrective information to the public. Specifically, Plaintiffs note that: · On June 20, 2001, Morgan Stanley Dean Witter issued a report noting "greater uncertainty" regarding Qwest's long-term growth forecasts, "stemming from accounting decisions made since the Qwest merger with U.S. West." Compl. ¶ 317. "On 8/3/01, The Street.com published a story, . . . which stated in part: `The bears are speculating that Qwest's financial results got an unnatural boost from [improper] deals,'" and that "`critics point out that such transactions are accounted for in a manner that, while entirely legal, particularly helps Qwest's bottom line.'" Compl. ¶ 330. "In early 10/01, Qwest came under fire when analysts learned the Company was planning to recognize some $300 million up front from a multi-year deal with Calpoint," and that "[b]y this point, analysts were much more aware of the manipulations Qwest had engaged in and objected to the immediate revenue recognition." Compl. ¶ 337.

·

·

Plaintiffs have asserted, and no doubt will continue to assert, that the curative information noted above, as well as similar information disclosed by Qwest itself in its

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public filings and press releases, "did not apprise the market of just how poorly Qwest was doing in terms of generating recurring revenue or its falsification of its financial results." Compl. ¶¶ 335-337. See also id. ¶ 342 (asserting that curative announcement by Qwest "did not inform the market of Qwest's improper reporting"). This argument is without merit for two principal reasons. First, the argument cannot be squared with the fraud-on-the market theory on which Plaintiffs purport to rely. As a district court in this Circuit has noted: Plaintiffs are in an uncomfortable situation. They allege that the impersonal, efficient market reacted to the material misrepresentation made public. . . . At the same time they contend that the market was inefficient because it failed to notice the potential curative article released to the public. . . . Plaintiffs cannot maintain that the market was efficient regarding the misrepresentations but somehow became inefficient regarding the curative article. In re Ribozyme, 205 F.R.D. at 581. More importantly, even if the Court were to find that there is uncertainty as to whether the curative information noted above served to end the class period as of June 20, 2001, inclusion of post-June 20, 2001 purchasers in the proposed class would complicate the trial and exacerbate existing conflicts among class members. In order to conclude that the class period did not end as of June 20, 2001, the Court must find that "there is a substantial question of fact as to whether the [information] cured the market or was itself misleading." In re Ribozyme, 205 F.R.D. at 579 (citation). However, because the jury must ultimately resolve this "substantial question of fact," id., postJune 20, 2001 purchasers would have to present evidence to rebut the presumption that

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they did not purchase in a market that had absorbed the potentially curative information. Why would pre-June 20, 2001 (or pre-October 2001) purchasers want to be in the same class as investors who purchased after the dissemination of such information on those dates, if that means that the jury will hear evidence that the market was aware (and Qwest's price reflected market awareness) of the challenged practices? Similarly, why would investors who purchased before the other curative disclosures identified in the complaint want to be in the same class as investors who bought after the market was aware of the purportedly curative information, and who would be subject to additional defenses? They would not. Another conflict. Example 4. Conflicts Between Purchasers Before and After June 30, 2000 and Between Classic Qwest and Classic U.S. West Purchasers : The proposed class contains members who purchased Qwest securities before and after Qwest's merger with U.S. West was consummated on June 30, 2000. Qwest was a fundamentally different company before and after the merger ­ growing from approximately a $5 billion revenue per year company providing long distance and telecommunication services to several hundred thousand customers to a $20 billion revenue per year company that provided local phone service to almost 20 million customers. The investors who purchased prior to the merger bought stock in a company very different from the post-merger company. As it relates to IRUs, IRUs were a significantly higher proportion of Qwest's revenues prior to the merger than following the merger. There was also almost complete turnover in the individuals responsible for IRU

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accounting employed in Qwest's accounting departments before and after the merger, meaning that the story line explaining who was responsible for the fraud is very complicated if purchasers in both time periods are in the class. Later investors would have no interest in having the jury hear from witnesses relevant to the accounting issues prior to the merger, and vice-versa, because in addition to increasing the risk of jury confusion, presenting both sets of witnesses will require prolonging what will already be a very long and complicated trial, and run the risk of alienating the jury. Moreover, as discussed in Qwest's brief, if, as Plaintiffs allege, Qwest's stock was artificially inflated at the time of the merger, Qwest owners at that time would have benefited by acquiring U.S. West assets at a discount. Hence, these groups of shareholders are in conflict with one another. Example 5. The Conflicts Arising From Developments in the Relevant Accounting Literature: The record evidence demonstrates that the relevant generally accepted accounting principles governing IRUs tightened over the course of the class period. Thus, there is bound to be different and conflicting trial strategies and presentations regarding the materiality of Qwest's departure from applicable accounting standards depending on when class members purchased Qwest's securities. For example, Plaintiffs allege that Qwest failed to meet the applicable title transfer requirements in order to recognize revenue on their IRU transactions. Compl. ¶ 187. But the title transfer accounting requirements were constantly shifting over the course of the class period. Indeed, there were three major shifts in the relevant

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accounting guidance over the class period, such that the requirements for title transfer prior to July 1999 are completely different from the requirements for title transfer after July 2001. The title transfer requirements were far less rigorous before July 19, 1999 than after that date, were less rigorous before May 18, 2000 than afterwards, and were less rigorous after July 17, 2001 than afterwards. There are numerous other accounting pronouncements that were promulgated over the class period that affected Qwest's accounting for IRUs. Hence, the Plaintiffs' explanation as to why Qwest's accounting was purportedly wrong necessarily becomes far more complicated the longer the class period at issue. Example 6. The Conflict Between Equity and Debt Security Owners : As stated above, Plaintiffs propose a class of all purchasers of Qwest securities, including Qwest common stock and bonds, between May 24, 1999 and February 14, 2002. The record evidence in this case reveals a serious conflict between purchasers of Qwest common stock and purchasers of Qwest bonds as to defeat class certification. Bond purchasers are different from common stock purchasers in that the former were concerned with Qwest's debt ratio liquidity and ability to service the debt and repay it upon maturity, reflected in ratings by bond rating agencies. In re Ames Dep't Stores, Inc. Note Litig., 991 F.2d 968, 980 (2d Cir. 1993). The interests of purchasers of equity securities, on the other hand, rest on the company's earnings and growth rates. Id. Thus, the information important to bond purchasers was different from that significant to common stock purchasers, and what allegedly caused each price decline

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was different. Notably, while the price of Qwest common stock suffered significant decline after the allegedly corrective disclosures of 2001, bond prices remained generally steady. Second, publicly available trading records also make clear that, unlike Qwest common stock, all of the Qwest bonds at issue in the class action were issued and began trading long after the allegedly corrective disclosures concerning IRU transactions were publicly disseminated beginning in June 2001.4 Pre-June 2001 purchasers of Qwest equity securities will emphasize the fact that they purchased before the "corrective disclosure" and thus had no way of knowing about the alleged falsity of Qwest's financial statements and Andersen's opinion regarding such statements, on which the putative class members purportedly relied. On the other hand, all purchasers of Qwest debt securities would have the more difficult task of presenting conflicting evidence showing that, despite the corrective disclosures, which put them on notice about Qwest's allegedly misleading statements regarding its accounting practices, they made their purchases in reliance on the allegedly false statements by Qwest and Andersen. Holders of Qwest debt securities would therefore be subject to a different burden of proof on primary elements of their case (including the elements of materiality, loss causation and damages), which holders of Qwest common stock would not face, thereby creating an antagonism between the two types of

4

See Mot. at 5 n.5 (noting that the putative class contains persons who purchased Notes issued by Qwest between June 2001 and October 2001).

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securities holders. See, e.g., Kusner v. First Pa. Corp., 531 F.2d 1234 (3d Cir. 1976) (holding that the holder of a simple debenture with no convertibility features faced a different materiality issue than a holder of stock or debentures with convertibility features). Moreover, as Qwest notes in its brief, Plaintiffs have not alleged that Qwest's debt securities traded in efficient markets, meaning that each debt holder will be required to individually demonstrate that they relied on Andersen's purportedly false statements. Such individualized proof would quickly predominate over the trial. Why would Qwest equity holders want to participate in the mindnumbingly repetitive presentation by dozens of bondholders who need to establish actual and justifiable reliance. They would not. Hence, another conflict. II. Predominance of Common Questions, Superiority and Manageability Problems The analysis set forth above demonstrates that Plaintiffs cannot prove that the proposed class satisfies the requirements of Rule 23(b), i.e., that common issues predominate over individual issues, or that a class action is superior to other available methods for the fair and efficient resolution of the controversy. The length (approximately thirty-three months) of the proposed class period and the broad sweep of investors and securities aggregated together serve to compound the manageability problems. As individual litigants, in order to succeed, any given member of the class would have to prove the existence of misrepresentations, scienter, materiality, causation, and inflation of Qwest stock price on the date of that class member's

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purchases. At each step of the way, depending on the type of securities they purchased and when they purchased, different class members would confront different set of circumstances -- ranging from materially different types of alleged misstatements, a different mix of information, including potentially curative information, constantly fluid accounting standards, and highly volatile stock prices -- against which loss-causation, materiality, and damages would be measured. Such "disparities among class members," effectively "undermine[s]" whatever "class cohesion that might emerge from the common issues of fact regarding the consequences" of Andersen's allegedly misleading statements, as to preclude certification. In re Ford Motor Co. Ignition Switch Products Liability Litigation, 174 F.R.D. 332, 340 (D.N.J. 1997) (citing Amchem, 521 U.S. at 623-24). See also Bell Atlantic Corp. v. AT&T Corp., 339 F.3d 294, 301-02 (5th Cir. 2003) (certification improper where "individual stakes are high and disparities among class members great") (citation omitted). Indeed, given the amalgam of competing and conflicting interests of members of the putative class, there is the distinct possibility that the "availability of information may not be common to the class," and the "extent of knowledge of omitted facts or reliance on misrepresented facts" would vary across the class. Zimmerman v. Bell, 800 F.2d 386, 390 (4th Cir. 1986). As such, the "question of whether the [claimed] omission [or misrepresentation] was material might require an individual inquiry for each shareholder." Id. To say, therefore, that common issues predominate in this action would mean that the "predominance criterion," which is far more demanding than the

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requirement of common issues standing alone, "would be stripped of any meaning." Amchem, 521 U.S. at 623-24. Conclusion For the reasons set forth above, Lead Plaintiffs' Motion for Class Certification should be denied. Respectfully submitted,

s/Tim Atkeson Tim Atkeson Joshua D. Franklin ARNOLD & PORTER LLP 370 Seventeenth Street Suite 4500 Denver, Colorado 80202 (phone) (303) 863-1000 (fax) (303) 832-0428 Scott B. Schreiber John A. Freedman Elissa J. Preheim Kwame A. Clement Shelby H. Hunt ARNOLD & PORTER LLP 555 Twelfth Street, NW Washington, D.C. 20004-1206 (phone) (202) 942-5000 (fax) (202) 942-5999 Counsel for Defendant Arthur Andersen LLP Dated: June 30, 2005.

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CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the foregoing ARTHUR ANDERSEN LLP'S OPPOSITION TO LEAD PLAINTIFFS' MOTION FOR CLASS CERTIFICATION was served via email to all parties, except for William S. Lerach who will be served by Federal Express, on this 30th day of June, 2005, addressed to the following: Robert J. Dyer, III Kip B. Shuman Jeffrey A. Berens Dyer & Shuman, LLP 801 East 17th Avenue Denver, CO 80218-1417 Liaison Counsel for Plaintiffs (303) 861-3003; (303) 830-6920 (fax) [email protected] [email protected] [email protected] William S. Lerach Spencer A. Burkholz Daniel S. Dorsman Thomas E. Egler Ray A. Mandlekar Robert R. Henssler, Jr. Darren Robbins, Jr. Lerach, Coughlin, Stoia & Robbins LLP 401 B. Street, Suite 1700 San Diego, CA 92101-4297 Lead Counsel for Plaintiffs (619) 231-1058; (619) 231-7423 (fax) [email protected] [email protected] [email protected] [email protected] Jason R. Llorens Lerach, Coughlin, Stoia & Robbins LLP 9601 Wilshire Blvd. Suite 510 Los Angeles, CA 90210 Lead Counsel for Plaintiffs (310) 278-2148 (fax) [email protected]

Jonathan D. Schiller David R. Boyd Alfred P. Levitt Kenneth F. Rossman IV Boies, Schiller & Flexner, LLP 5301 Wisconsin Avenue, N.W., Suite 800 Washington, D.C. 20015-2127 Attorneys for Defendant Qwest (202) 237-2727; (202) 237-6131 (fax) [email protected]* [email protected] [email protected] [email protected]

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Terence C. Gill Sherman & Howard, L.L.C. 633 Seventeenth Street Suite 3000 Denver, Colorado 80202 Attorneys for Qwest Communications International, Inc. (303) 297-2900; (303) 298-0940 (fax) Frederick J. Baumann James M. Lyons Cindy C. Oliver Cleo Rauchway Rothgerber Johnson & Lyons LLP 1200 17th Street, Suite 3000 Denver, CO 80202-5855 Attorneys for Defendants Philip Anschutz, Linda Alvarado, Craig Barrett, Hank Brown, Thomas Donohue, Jordan Haines, Peter Hellman, Cannon Harvey, Vinod Khosla, Marilyn Carlson Nelson, Frank Popoff, Craig Slater and W. Thomas Stephens (303) 623-9000; (303) 623-9222 (fax) [email protected] [email protected] [email protected] [email protected] James Nesland Paul Schwartz Cooley Godward LLP 380 Interlocken Crescent, Suite 900 Broomfield, CO 80021-8023 Attorneys for Defendant Drake Tempest (720) 566-4000; (720) 566-4099 (fax) [email protected]

Robert N. Miller Stephanie E. Dunn Perkins Coie, LLP 1899 Wynkoop St., Ste. 700 Denver, CO 80202 Attorneys for Defendant James A. Smith (303) 291-2300; (303) 291-2400 (fax) [email protected] [email protected] Wesley R. Powell Clifford Chance US LLP 31 West 52nd Street New York, NY 10019-6131 Attorneys for Defendant Robert Woodruff (212) 878-8375 [email protected]

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Charles A. Stillman Kimo S. Peluso Michael J. Grudberg Scott M. Himes Stillman & Friedman, P.C. 425 Park Avenue New York, NY 10022 Attorneys for Defendant Joseph P. Nacchio (212) 223-0200; (212) 223-1942 (fax) [email protected] [email protected] [email protected] [email protected]

Bruce F. Black Michael J. Hofman Martin Litt Holme Roberts & Owen LLP 1700 Lincoln Street, Suite 4100 Denver, CO 80203 Attorneys for Defendants Philip Anschutz and Craig Slater [email protected] [email protected] [email protected]

Joe R. Whatley, Jr. Whatley Drake, L.L.C. Post Office Box 10647 Birmingham, AL 35202-0647 Attorney for Plaintiffs in the ERISA matter (205) 328-9669 (fax) [email protected]

_s/ Jeff Lewis_____ Jeff Lewis