T_INITED STATES DIsT rucT COURTSOUTHERN DISTRICT OF NEW YORK X . • eDa/MIAS MI Z, on behalf of 6 •

s -nilarly situated, Uti_ActioNo.4q1ZIEPlaintiff, •

CLASS ACTION COMPLAINT- against-

JURY TRIAL. DEMANDEDSALOMON SMITH RAItN EY INC.and JACK GRUBMAN,

•Defendants. •

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Plaintiff Douglas Millowitz, by his attorneys, 13eatie and Osborn LLP, for his

complaint against defendants Salomon Smith Barney Inc. ("Smith Barney") kind Jack Grubman, s •

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alleges as follows:. .

NATURE OF THE ACTION

•This is a securities fraud class action on behalf of all persons and entitiwho

purchased the securities of Metromedia Fibre Network Incorporated ("Metromedia" pi the

"Company') between November 25, 1997 and July 25, 2001. inclusive (the "class" and the "class

period," respectively). Defendants defrauded the class by (i) issuing positive recommendations about

-Metromedia even though there werc no rational economic reasons or factual bases to justifv such

recommendations; (ii) failing to disclose that they were issuing favomble recommendations to obtain

investment banking business; and (iii -) concealing significant, material conflicts of interest that

prevented them from providing independent, objective analyses. Defendants advised the public to

ignore rational concerns regarding Mctromedia's business and operations and instead used their

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in Flue-rice and repuiaiion lo (out du: Company's slock even though they knew or recklessly

disregarded tha I ihere existed no reasonable basis for the positive. recomm.endations.

2. I)uring t he Aims period, while defendants were issuing positive recommendations

regarding the Company, Metromedia common stock and other securities were trading at artificially

inflated prices. For example, Metromedia's commons stock traded as high as $ 103.75 per share.

Only after the stock fell to less than $1 per share did the defendants finally downgrade their

recommendations.

3. Plainii If hrings (his action on behalf of himself and all others who purchased

Metromedia securities during the class period who have been damaged as a result of defendants'

conduct.

JURISDICTION AND VENUE

4. 'File claims assened herein arise under and pursuant to Sections 10(b) of the Securities

Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), and Rule 10b-5 promulgated

thereunder hy the SEC, 17 C.F.R. § 240.10h-5.

5. This Court has jurisdiction over the su bject matter of this action pursuant to 28 U. S.C.

§ 1331, and Section 27 (lithe Exchanue Act, 15 LI.S.C. 78u(a.

6. Venue is proper in this District pursuant to Section 27 or the Exchange Act and 28

§ 1391(h) because Smith Barney has its principal place of business in this District. In

addition, venue is proper in this District because many of the material acts and injuries alleged in this

Complaint occui ted. within this District. Such acts include practices and conduct that violated the

Exchange Act.

7. In connection with the acts, conduct, and other wrongs complained of herein, the

defendants, directly and indirectly, used the means and instrumentalities of interstate commerce,

including the mails, telephone communications and thc facilities of interstate commerce.

'11 1I PARTIES

Plaintiff purchased Metromedia securities during the class period as set forth in the

attached certification.

9. Defendant Smith Barney is a brokerage tirm with its principal place of business at

3n Green wich, New York, Nev,,. York 10013.

I O. Defendan[ Jack Cirtihman has been at all relevant limes a telecommunications analyst

at Smith Barney, Upon information and belief, Grubman is a citizen of tile State of New York and

resides in New York City.

CLASS ACTION ALLEGATIONS

11. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23 on behalf of a class consisting of all persons and entities who purchased securities of

Metromedia during the class period. Kr...tweet-1November 25, 1999 and July 25, 2001.

12. Excluded from the class are defendants, the officers and directors of the Companv,

members o I their immediate families and their legal representatives, heirs, successors and assigns,

and any entity in which the Company has or had a controlling interest.

13. The class is so numerous that joinder of all class members is impracticable. While

the exact number of class members is unknown to plaintiff and can only bc ascertained -From the

records maintainer/ by Metromedia or its agents, as of June 30, 2001, over 545 million shares of

Metromedia Class .A common stock were issued and outstanding, and billions of dollars of other

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Niiciromedi a. securities (e.g. notes. convertible stock) were issued and outstanding. The number of

class members is likely many thousands.

14. Plaintiffs claims are ypical of the claims of the members of:the class because all

members of the class purchased Metromedia securities during the class period and sustained

dama ges arising out of defendants v,forigiul conduct.

15. Metromedia's securities were publicly traded in an efficient, open and well-informed

market which assimi Lied ihe information about the Company.

16. Plaintiff -will fairly and adequatel y protect the interests of the members of the class„

has retained counsel competent and experienced in class action and securities litigation, and has no

interests antagonistic to or in conflict with the other members of the class.

17. To achieve the fair and efficient adjudication of this controversy, a class action is

superior to other methods. Joinder of all class members is impracticable. The likelihood of

individual class members prosecuting separate claims is remote because the damages suffered by

many individual class members arc relatively small and the expense and burden of individual

litigation likelv would prevent class members from seeking individual redress. No unusual

difficulties arc likely to be encountered in the management of this class action.

18. Common questions of law arid fact exist for all members of the class and predominate

over any questions applicable to individual members of the class. Among the questions of law and

fad common to the class are: •

a. did defendants violate the federal securities laws; . ..„,• .,-.•••:„

b. did dolo'idants issue positi ve recommendai ions about. Metromedia when therecommendations did not reflect thc true prospects of the Company;

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c. did &fondants fail to disclose that they were issuing favorablerecommencla ions to obtain investment bankin.g business;

d. did defendants fail to disclose significant, material conflicts of interest thatprevented them from providing independent, objective analyses;

e. did defendants fail to disclose . material, adverse information which they .possessed about Metromedia;

did defendants act knowingly or recklessly when they made the materiallyfhlse and misleading statements or omissions;

g. were the market prices of Metromedia securities artificially inflated duringthe class period because or defendants' cordite'; and

h. did members of the class sustain damages as a result of improper conduct bythe defendants and, if so. Wha t is the. proper measure of damages.

FACTS

Background

19. Metromedia was one of a number of companies "covered" or followed by Smith

Barney. Specifically, Metromedia was one of several fc.lecommunications stocks covered by analysts

in Smith Barney's telecoininunications research group and was one of approximately thirty-four

telecommunications stocks covered by defendant Grubman.

20. Historicall:k.z, stock analysts worked in the research department of a brokerage fimi and

provided objective research reports that were solii to portfolio nnanagers and pension funds to help

them make more informed investment decisions. The analysts helped generate trades, and those

trades, in turn, generated commissions for the brokerage firm. These commissions enabled the

research departments to be financially self-supporting.

21, In 1975, the New York Stock Exchange deregulated commissions, making trading,

and therefore research, less profitable. As commissions declined, Wall Street firms like Smith

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Bartley began integrating their analysts into their investment banking departments to take advantage

o tl le analysts knowic:dge. of particular industries and particular companies.

All of the IllajOr investment banks, including Siriilli Barney, began using their high-

pro file analysts to help them obtain investment banking business. Investment banking departments

generate revenue by hclping companies with, among other things ; stock offerings (particularly initial

public offerings), debt offerings, and mergers and acquisitions.

Over the last several years, analysts began working closely with investment bankers

and even accompanied investment bankers on sales calls to corporations. The result of the new

relationship between analysts and in vcstmciithaiiLcni Chat the traditional role ofanalyst as adviser

to retail customers has been severely compromised.

24. Since 1999_ Smith Barney's telecommunications research group has published ratings

for telecommunications stocks, including, Metromedia, that were materially falsc and misleading.

These ratings were false and misleading because: (1) the ratings did not reflect the analysts' true

opinions of the company; (2) Smith Bamey had an undisclosed, internal policy- to not make any

negative recommendations; (3) the recommendations were made with knowledge of material,

adverse, non-public information: and (4) Smith .Bamey failed to disclose that it had a conflict of

interest that prevented it from giving independent, objective recommendations.

25. Smith Barney and Grubman rated Internet stocks both for near-term and long-term

growth, using thc tbllowin2 terms: "Buy." ''Outperform," ''Neutral," "Underperform," and "Avoid."

26. From he Fall or 1997 until die Summer or 2001, Smith Barney did not publish a

single negative rating for any stock covered bv the telecommunications group.

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27. Defendants refused to rate a stock "Neutral," "Underperform" or 'Avoid" because it

woukl have jeopardized Smith Barney's efforts to obtain investment banking business from

telecommunications companies like Metromedia. Since the analysts werc partly compensated based

on the investment banking business they generated or participated in analysts attempted to curry

favor with potential or actual investment banking clients. at times allowing clients and potential

clients to redraft reports about their COM pan ies, write quotations in which the analysts would tout

their companies, and indicate ratin gs that %Non Id be acceptable to them.

2. Between December 1999 and Novernbcr 2001, tlic telecommunications research

group was invol vcd in transactions [ hai resul led in more than $100 million in revenue for Smith

Metromedia

29, Metromedia COnStilletS intracity and intercity fiber optic networks kir the transmission

of data and leases the use of thc networks to communications carriers as well as corporate and

government customers in major metropolitan areas in the United States and Europe.

10. Metromedia was founded in 1993 anti was taken public on October 28, 1997.

31 The initial public offering was underwritten by defendant Smith Barney and other

investment hanks. Thc stock sold for S16 per share and raised $146 million, or $133.9 million after

deducting the underwriters commission and expenses relating. to the initial public offering.

32 . Defendant Smith Barney was a lead manager for Ifie offering and earned millions of

dollars in fees for its .,..vork 111 helpin g to tale akirg the Company public.

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33. On November 25, 1997, Smith E3arney initiated analyst coverage of the Company with

a "Buy" rating, Smith Barney's. highest rating, and gave th3 stock a 12 to 18 month share-priee target

of S27 to $30.

34. Over the next few years, Metromedia borrowed billions of dollars to iiind its rapid

expansion, corporate acquisitions and construction of fiber optic networks. Smith Barney- managed

a number of these transactions and, in one transaction, assumed the role of Mctromcdi a's creditor.

hroughout this period. Smith Barney maintained its "Buy rating on the stock.

35. On November 25, 199 g, the Company issued and sold senior notes in a Rule 144A

offering to accredited investors, generating nct procccds of S650 million. with Smith Barney acting

as lead manager. The notcs bad a 10% interest ohhgation and mannity date of November 15, 2008.

36. In 1998, the Company barely tumed a profit, netting less than $1 million for the year.

Although this was an improvement from the previous year's $26 million loss, it was inadequate to

meet Metromedia's large interest payment obligations on its outstanding debt and insufficicnt to pay

its day to day operating expenses.

37. Despite the Company's inability p service its debt, enorrnous burn rate, and

dcterinrating fundamentals, Smith Barney continued to maintain its "Buy" rating throughout 1998.

18 . On October 25, 1999, he Company again issued and sold 10-year senior notes with

Stu itl [ Barney acting as lead manager. The notes, which were denominated in both Furos and U.S.

dollars, generated proceeds of almost Si billion. As lead manager, Smith Barney earned millions

of dollars for its -work.

On November 11, 1999, Metromedia priced 10 million shares of debt exchangeable

for common stock, or DECS, at$39.4375. again using Smith Barney, These DECS wcrc offered

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through a company trust and were convertible into shares of Metromedia's common stock at a price •

of $46.5339 with a maturity date ofNovember 15, 2002. Smith Ramey earned substantial fees from

this transaction as well.

40. In 1999, although Metromedia's revenue doubled from 1998 to $75 million, its

expenses increased four-fold from the previous year_ This was predominantly caused by the

inclusion of revenue and expenses from AboveNet, a company Metromedia had acquired in

September 1999. Expenses also increased as a result of interest expense obligations arising out of

the sale of 10% senior notes due in 2008 and 2009. The: Company posted a $115 million net loss

for 1999_

41. Despite Metromedia's increasing debt and its inability to meet its expenses, Smith

Barney maintained its "Buy" rating throughout 1999 as well.

47, Metromedia's heavy borrowing continued in 2000. On March 6, 2000, Verizon

purchased about $1 billion in Metromedia convertible bonds with a conversion price of $17 a share

and another S7I5.4 million in common stock, equal to about 18% of the Company (assuming all

bonds were converted to stock). Because Metromedia's stock price had fallen well below the agreed

strike price of $17 a share, Verizon was forced to write off $356 millioii o fits bond investment over

the first and second quarter of 2001.

43, In 2000, Metromedia's expenses again overshadowed its rcverme. This was caused

by large expenses incurred by AboveNet and interest expense obligations on the Company's bonds.

The Company posted a $400 million loss for 2000, up from a $115 million net loss tile previous year,

44. Despite Metromediz.t's continued financial deterioration, Smith Barney continued to

maintain its highest rating of "Buy" for the Company throughout 2000.

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45. In 2001, Smith Barney . became even more entangled with lvletromedia l s business and

operations financial by becoming a creditor of the Company.

On January 9, 2001, Metromedia announced i had obtained a S350 million senior

credit facility From Citicorp USA and Smith Barney. This included a $150 million long-tenn loan

and a S200 million term loan. In truth, ST11 ith Bartley had promised to give Metromedia only . $62.5

million; Metromedia was obligated to raise the remaining $287.5 million by Ma y 15, 2001,

47. When Metromedia was not able to raise the money by tl le May 15, 2001 deadline,

Smith Barney extended the deadline twice, to July 31, 2001.

48. Metromedia c.entinued to run at a loss durinL, 2001, and due to its financial distress

could not file its Annual Report on Forrn 10-K fOr 2001,

49. Nevertheless, defendards Grubman and Smith Barney did not reduce their 'Buy'

„ rating. Indeed, in a research note dated June 27, 2001, when the Compan y's share price had dropped

to S2.17 per share. defendant Grubman stated: We continue to believe that Metromedia Fiber

Network is a survivor. We also continue to believe. that [Mctrornedial is a buying opportunity today

for risk-savvy investors."

50. On July 25, 2001, defendants Gru bman and Smith Barney downgraded Metromedia's

rating from ''Buy" to "Neutral," By that time, the Company's share price had declined to $0.79 per

share,

51. After Metromedia missed the July deadline, Smith Barney gave the Company until

August 15, 2001 to obtain $287.5 million toward the credit facility and a $200 million line of credit

from its vendors. Metromedia claimed that it had raised S108 million toward Ole credit facility,

leavina a remainder of $107.5 million not vet secured.

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52. UltimateIv, Smith Barney and Metromedia altered tiieir deal. On October 1, 2001,

the Company completed a $611 million financing package, including a $ 1 50 Million note purchase

faciiiw led by Smith Barney, $230 million in convertible debt financing and $2:11 million in vendor

financing.

53. Even with the new finaneinR, Metromedia could not survive. in April 2002, the

Company defaulted on a $30 million interest payment due to Verizon. Metromedia also disclosed

that it would have to restate its 2001 results to a loss of up to $5.36 billion because its aeco•untants

refused to sign off on the Company's financial statements.

: 54. Finally, on 71/1ay r 20, 2002, Meiromedia .filed for protection under Chapter 11 of the

II.S. Bankruptcy 17,:oile and was delisted from the NASDAQ exchange.

Smith Barticy's Material Omissions and Misrepresentations

55. Defendants issued positive recommendations. despite the absence of any factual basis

for doing so. with the express intention of inflating Metromedia's stock price and garnering

investment banking business from Metromedia and others.

56. While defendants were reiterating positive recommendations for Metromedia's stock

and recommending to investors to ignore lOetromedia's deteriorating fundamentals, defendants knew

that there existed no rational economic basis for their positive recommendations.

57. The dissemination of the positive recommendations was part of an effot •t to maintain •

and expand defendants' investment banking business.

58. By placing the interesk of i ts investment banking clients above its retail customers.

defendants Smith Barney and Grubman have caused plaintiff and other members of the class to

suffer millions of dollars in losses relating to purchases of Metromedia securities,

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COUNT 1

FOR VIOLATION OF SECTION 10(b) OFT111: EXCI I A NGE ACT AND RULE 10(b)-5

PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS

59. _Plaintiff repeats and realleges each of the preceding paragraphs as though fully set

forth herein.

GO. Each of the recommendations Smith Barney issued during, the class period was

matcriall n„, faisc and misleading because: (1) thc ratim__T;,; did noi reflect the analysts' true opinions of

the Company; (2) !Smith Barney had an undisclosed, internal policy to not make any negative

recommendations; (3) the recommendations were made with knowledge of material, adverse, non-

,. public and undisclosed information re.garding the Company; and (4) Smith Barney failed to disclose

that it had a conflict of interes[ that prevented it from giving independent. objective

recommendations,

61. Plainti Fraud other members of the class relied on the positive but materially false and

misleading recommendations and believed them to be true. In reliance upon thc recommendations

andlor the integrity of the market, and the fidelity, integrity and superior knowledge of the

defendants, plaintiff and the other members of the class purchased Metromedia securities at

artificially inflated prices during the class period, and were damaged thereby.

62. Defendants knew. Or were delibctately rceklc..ss in failin g to know, of the material

omissions and nil sslaturnents 11111 tained in their recommendations and were motivated by their desire

to generate millions of dollars in investment banking lees from the Coinpanv and other issuers ).vho

expected defendants to issue positive recommendations to support their securities.

63. By reasoii of the conduct alleged herein, defendants, and each of than, knowingly or

with deliberate recklessness violated Section 10(13) of the Exchange Act and Rule 10b-5 promulgated

thereunder, in that they (a) employed devices, schemes and artifices to defraud, (b) made untnie

statements of material facts or omitted to state material facts necessary in order to make statements

made, in 1.i ght of the circumstances under which they were made, no misleading, and (c) engaged

in acts. practices and a course of business that operated as a fraud and deceit upon plaintiff and thc

other members of the class in connection with their purtthases of the Company's securities during the

class period.

64. Plaintiff and other members of the class suffered substantial damages in that, in

reliance on the integrity of the market, they paid artificially inflated prices for the Company's

securities as a result ofdefenclants violations of Section 10(b) of the Exchange Act and Rule 10b-5.

At the respective times of the purchases during the class period by plaintiff and the other members

of the class, The fair market value thereof was substantially less than the prices which they

respectively paid for said securities.

WHLK_'EFORE, plaintiff demands . judgmetit on behal 1- of himself and the members of the

class as follows:

A. Declaring that this action be maintained as a class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure,

13. Ciranting judgment. in favor of plaintiff and the other members of the class against

. defendants herein, and each of them, for compensatory darnaiges, together with pre-judgment interest

at the maximum r-ile allowable by law;

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Oppoo.p.„

C. Awarding plaii !tiff IL.. cos's and disbursements of i his action, including reasonable

allowances of fees for plaintiff's attorneys and experts; and

Granting plaintiff and the class such other and further relief as the Court deems just

and proper.

Dated: New Yofk, New YorkSeptember 25, 2002

BEAM AND OSBORN 1.L P

By: 1. cuut LI- 1 r) Daniel A. Osborn {pp 2809)Fduard Korsinskv (EK 89891

521 Fifth Avenue, 34 4'. FloorNew York. New York 1 0175(212) 888-9000

• Attorneys for Plaintiff

index No.UNT.TED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YOft1(

DOLJCiLAS IvIII,LOWITZ, on behalfof himself and all others similarly situated,

Plaintiff,

-against-

SALOMON SMITH BARNEY, andJACK GRUHMAN,

Defendants.

1

CLASS ACTION COMPLAINT

BEATIE AND OSDORN LP

Attorneig Eft-aP iffNE,,v )0F.K.r..Evo ).DR•: I 5