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Citigroup Settles WorldCom Case

The bank agrees to pay $2.65 billion to bond and stock buyers hurt in the telecom company's accounting fraud.

May 11, 2004|From Associated Press

In one of the largest securities-fraud settlements ever, banking giant Citigroup Inc. will pay $2.65 billion to settle a lawsuit brought by WorldCom investors who lost billions when the company filed for bankruptcy protection in an accounting scandal.

The deal announced Monday was the first of what could be several large WorldCom settlements. New York state Comptroller Alan G. Hevesi, who is leading the class-action case, said he was pursuing similar deals with 17 other banks that could result in $2.8 billion more for WorldCom investors.

Those banks were given 45 days to agree to a settlement similar to Citigroup's or face trial next January.

Citigroup's brokerage division was a key backer of WorldCom securities before the telecommunications company entered Chapter 11 in July 2002 amid an $11-billion accounting fraud. Citigroup and the other investment banks underwrote about $17 billion in WorldCom bond issues in 2000 and 2001.

Lawyers declined to say what the investors' total losses were or what percentage the Citigroup settlement represented of those losses. Lawyers' fees also will come from the settlement.

The settlement covered allegations of misconduct by Citigroup and its Salomon Smith Barney investment divisions as well as former star analyst Jack B. Grubman, one of the most influential power brokers of the technology boom.

Grubman left Citigroup amid investigations into his alleged conflicts of interest in touting the stocks of telecom companies such as WorldCom. He was fined $15 million and permanently banned from the securities industry last year for what regulators said were fraudulent research reports.

New York-based Citigroup denied violating any laws but said it was settling "solely to eliminate the uncertainties, burden and expense of further protracted litigation."

Chief Executive Charles Prince said the settlement was designed "to put an unfortunate chapter behind us so we can focus on our continuing prospects for growth."

It was the second-biggest settlement of a securities class action, after a $3.2-billion settlement by services giant Cendant Corp. in 2000, Hevesi said.

Citigroup still faces claims related to Enron Corp.'s collapse and to its practices in awarding hot new stock offerings to clients.

The WorldCom case was brought on behalf of those who had purchased stock and other securities from April 29, 1999, through June 25, 2002. Hevesi said bondholders would receive $1.45 billion and former shareholders would get $1.2 billion in the Citigroup settlement.

Investors also will be eligible for some funds from a $750-million WorldCom settlement with the Securities and Exchange Commission, but it will be pennies on the dollar.

The company now known only as MCI emerged from bankruptcy protection and shed more than $35 billion in debt.

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