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N.Y. Fund, Shareholders Sue Citigroup, Ebbers Over Loans

The suit contains the latest allegations that the financial services firm offered favorable deals to executives.

October 15, 2002|From Bloomberg News

Citigroup Inc.'s insurance unit loaned $679 million in 1999 and 2000 to a company controlled by Bernard J. Ebbers, WorldCom Inc.'s then-chief executive, creating a conflict of interest for the bank, a shareholder lawsuit says.

New York State Comptroller H. Carl McCall, trustee of the New York State Common Retirement Fund, filed the complaint against Citigroup and Ebbers on Friday on behalf of the fund and all other shareholders suing WorldCom for alleged securities fraud. Citigroup denied wrongdoing in making the loans and disputed loan details in the complaint.

The suit contains the latest shareholder and prosecutor accusations that the biggest financial services company offered favorable deals to executives of companies, including WorldCom, in exchange for investment banking business. Several months after Ebbers' company received the loans, WorldCom selected Citigroup to arrange $17 billion in bond sales.

"It's just another smoking gun," said John Krause, an analyst at Thrivent Financial. "It shows there are reasons that Citigroup had to hype the stock."

Sanford Weill, Citigroup chairman, is moving to settle investigations by lawmakers, regulators and prosecutors into possible conflicts of interest between his bank's investment banking and research units that have contributed to a 36% drop in Citigroup shares this year.

Weill's plan to combine corporate lending, retail brokerage and investment banking businesses has attracted prosecutor and congressional investigations and shareholder lawsuits. Those investigating or suing Citigroup say it can't wear all its business hats without favoring one set of clients over others.

Citigroup agreed Sept. 23 to pay $5 million to settle NASD charges that former analyst Jack Grubman of its Salomon Smith Barney unit misled investors by recommending shares of Winstar Communications Inc. as the telecommunications company was sliding into bankruptcy.

Shareholders of more than 300 Internet-related companies have alleged that Citigroup and other banks allocated shares of high-demand initial stock offerings to executive clients, such as Ebbers, in hopes of winning investment banking business.

The Citigroup loans to Ebbers' company, Joshua Timberlands, allegedly were secured by WorldCom stock he owned, the lawsuit said. That gave Citigroup and Grubman, its Salomon analyst, incentive to promote WorldCom's stock to keep its price high, McCall said.

Citigroup denied the charges. The bank said its Travelers insurance unit loaned Ebbers' company $134 million of a $499-million loan package -- not one totaling $679 million. The Travelers amount, it said, was "fully secured by timber property and contracts, not WorldCom stock." The $499 million in loans was arranged with three other major insurance companies that Citigroup did not name.

Two Travelers entities, Travelers Life & Annuities and Travelers Property Casualty, lent $82 million and $52 million, respectively to Joshua Timberlands, the statement said.

Travelers is the only insurance company named on a "financing statement" filed in Mississippi regarding Ebbers' purchase of the real estate. That document, cited in the lawsuit, refers to a Feb. 15, 2000, amended agreement between Ebbers' company and Travelers that covers two "mortgage" loans of $430 million and $69 million -- or $499 million.

An amendment, filed Feb. 18, says the financing statement "shall also pertain to a $180-million loan" between Ebbers' company and Travelers.

McCall, whose fund was named lead plaintiff in August, alleged that Travelers lent Ebbers' entity $499 million in 1999 and an additional $180 million in 2000.

Reid Weingarten, Ebbers' lawyer, did not return calls seeking comment. WorldCom spokeswoman Julie Moore referred calls for comment to Weingarten.

The Travelers loans were made to fund the purchase of 460,000 acres of real estate in Alabama, Tennessee and Mississippi, McCall's complaint said. The real estate was purchased from Kimberly-Clark Corp.

Citigroup shares fell 9 cents to $30.31 in New York Stock Exchange composite trading.

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