Originally created 05/11/04

Citigroup agrees to pay $2.65 billion to settle WorldCom shareholder case



NEW YORK -- Financial services giant Citigroup has agreed to pay $2.65 billion to settle class-action suits brought by investors who bought WorldCom Inc. securities before the telecommunications company's bankruptcy filing in 2002.

Citigroup's brokerage division was a key backer of WorldCom securities before WorldCom filed for the biggest bankruptcy in history in July 2002 amid accounting irregularities. Last month, the company now known only as MCI emerged from bankruptcy and shed more than $35 billion in debt.

The settlement announced Monday comes as the world's biggest financial services company also set aside an additional $6.7 billion for potential claims against it related to the collapse of Enron Corp., its April 2003 settlement of federal inquiries into its investment research activities, and its involvement in preferential initial public stock offerings.

In early trading, Citi's shares were down $1.52, or 3.3 percent, at $45.20 on the New York Stock Exchange.

In the WorldCom matter, Citigroup said it had agreed to settle federal class action suits brought on behalf of those who had purchased WorldCom stock and other securities during the period from April 29, 1999, through June 25, 2002.

Charles Prince, chief executive of Citigroup, said the settlement was designed "to put an unfortunate chapter behind us so we can focus on our continuing prospects for growth."

Under the settlement, Citigroup said it denied violating any law but was settling "solely to eliminate the uncertainties, burden and expense of further protracted litigation."

It said the WorldCom payment will be allocated between purchasers of WorldCom stock and bonds. Lawyers' fees will also come from the settlement amount.

Citigroup said U.S. District Judge Robert W. Sweet and Magistrate Judge Michael H. Dolinger said in a signed statement attached to the agreement that they felt the settlement "was negotiated in good faith."

Prince said as a result of the WorldCom settlement, "we now have a better understanding of our remaining exposure for Enron and other litigation related to the 2003 regulatory settlements."

Citigroup is taking an after-tax charge for the settlement and the increase in litigation reserves of $4.95 billion, or 95 cents per share, in the current quarter.

Jim Moss, managing director for the financial institutions group at Fitch Ratings, said the agency would maintain its AA-plus on Citi stock.

"The entire amount ... is within the ranges of settlements we considered to be possible," Moss said.

Another major credit ratings agency, Moody's Investors Service, also affirmed its ratings on Citigroup.

The WorldCom scandal began unfolding in June 2002 when a company official uncovered an internal accounting scheme. Chief executive Bernard Ebbers was ousted in April 2002 and has pleaded innocent to federal fraud and conspiracy charges for allegedly directing a massive accounting fraud, now estimated at $11 billion.

Former CFO Scott Sullivan has pleaded guilty to conspiracy and securities fraud charges and agreed to testify against Ebbers.

When the company emerged from bankruptcy, virtually all of its debt was wiped out.

According to some expert estimates, shareholders lost $2.6 billion in the WorldCom collapse. Bondholders got some 36 cents on the $1.

Both groups of investors 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 reserve Citi is setting up is designed to cover possible liability for underwritings and research coverage of WorldCom as well as other cases over which it faces suits.

These include its July 2003 settlement of the Enron-related inquiries conducted by the SEC, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency and the Manhattan District Attorney.

They also include suits brought related to its April 2003 settlement of the research and IPO spinning-related inquiries conducted by the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange and the New York Attorney General.

Citigroup said the company believes that this reserve is adequate to meet all of its remaining exposure for these matters.

But it said that the amount could be more given "the uncertainties of the timing and outcome of this type of litigation and the significant amounts involved."

Citigroup said it will continue to defend itself vigorously in these cases, and to resolve them in the manner management believes is in the best interest of the company.