Banking & Capital Markets

Citigroup Settles WorldCom Investor Lawsuit

''We made a $1.64 billion insurance policy to avoid a roll of the dice in front of a jury,'' says Citi's CEO.
Stephen TaubMay 11, 2004

Citigroup Inc. took two very expensive steps toward resolving some very embarrassing relationships.

The world’s largest financial institution said it will pay $2.65 billion ($1.64 billion after tax) to settle a class-action lawsuit filed by investors in WorldCom Inc., which filed for bankruptcy after admitting to the largest accounting fraud in history.

Citigroup announced that in the second quarter, it plans to take a $4.95 billion after-tax charge reflecting the WorldCom settlement. Citi added that reserves for all remaining exposure related to Enron, and to other pending litigation related to 2003 regulatory settlements, increased to $6.7 billion, pre-tax. That amount exceeds the company’s record earnings of $5.27 billion in the first quarter of 2004.

“As a result of this settlement, we now have a better understanding of our remaining exposure,” said Citigroup chief executive officer Charles Prince, in a statement, “and have adjusted our reserves accordingly.”

Prince noted that Citi could have faced $54 billion in claims from the WorldCom lawsuit, according to Bloomberg. “We made a $1.64 billion insurance policy to avoid a roll of the dice in front of a jury,” Prince reportedly said on a conference call with investors.

Under the agreement, Citigroup will make payments to all individuals who purchased or acquired stocks and bonds of WorldCom, now renamed MCI, from April 29, 1999, through June 25, 2002. As part of the settlement, Citi denied it committed any violation of law and agreed to the settlement “solely to eliminate the uncertainties, burden, and expense of further protracted litigation.”

The lawsuit, which was filed against the Citi’s Salomon Smith Barney unit, alleged that former telecommunications analyst Jack Grubman engaged in misleading promotion of WorldCom securities even as the company was engaging in its massive fraud, according to CBS MarketWatch. A January report on WorldCom’s bankruptcy, by former U.S. Attorney General Richard Thornburgh, had said that former chief executive officer Bernard Ebbers’ relationship with Citigroup’s investment bankers breached his fiduciary duties, according to Reuters.