25 Banks Sue WorldCom, Allege FraudJul 14, 2002 | AP
A group of 25 banks charged in a lawsuit filed Friday that WorldCom Inc. defrauded them out of nearly $2.5 billion six weeks before publicly disclosing a $4 billion accounting coverup.
The banks' lawsuit, filed in Manhattan's State Supreme Court, included a request for an order to immediately freeze $2.65 billion of WorldCom assets. Justice Helen Freedman, after oral argument, denied the request and scheduled a hearing for July 16.
WorldCom got the money by way of a credit agreement signed June 8, 2001, with 27 banks, including Citigroup. That agreement allowed the communications giant to borrow, repay and reborrow up to $2.65 billion within a year, and it was conditioned on certain terms and representations by WorldCom.
Two of the 27 banks are not part of the lawsuit. The other 25, whose $2.49 billion in loans are 93 percent of the total, say in court papers that "on May 15, 2002, barely six weeks before disclosing a massive accounting fraud," WorldCom told the lenders by telephone "that it intended to draw down the entire $2.65 billion in a single borrowing."
Court papers say that on May 20, 2002, WorldCom assured lenders that its quarterly financial statement for the first quarter of 2002 was prepared in accordance with generally accepted accounting principles, and that it presented a fair picture in all respects of WorldCom's financial condition.
WorldCom issued a press release on June 25 disclosing an accounting fraud of "staggering proportions," the banks' court papers say. They say that if they had known the company's true condition they would not have permitted the loans.
WorldCom admitted that it had disguised $3.9 billion in expenses as capital expenditures so that it would appear to be more profitable. Court papers say Michael Salisbury, WorldCom's general counsel, "stated that the fraud had been perpetrated at the highest level of the company."
Separately, two Illinois pension systems are also suing after losing millions of dollars by investing in WorldCom.
The Teachers' Retirement System and the State Universities Retirement System claim WorldCom, some top executives and several investment firms knew the company was in financial trouble but hid that when selling $12 billion worth of bonds last year.
Jon Bauman, executive director of the Teachers' Retirement System, said his group lost about $11 million on the bond sale, and the university system lost roughly $4 million to $5 million.
The two pensions funds are also part of a class-action lawsuit against WorldCom.