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Citigroup Denies Loans To Ebbers Were Improper

Oct 14, 2002 | The Wall Street Journal

Citigroup Inc. denied allegations made in a lawsuit by New York State Comptroller H. Carl McCall that the financial-services company acted improperly by having its Travelers insurance units lend millions of dollars to a closely held company controlled by Bernard Ebbers, the former chief executive of WorldCom Inc.

In a statement, Citigroup said the suit inaccurately described details of the loans, including their size. Citigroup also said the loans were secured by timber properties that Mr. Ebbers' company purchased with the borrowed funds not Mr. Ebbers' shares of WorldCom stock, as the lawsuit alleged. A spokeswoman for Mr. McCall said the Democratic New York comptroller stands by the lawsuit's allegations and was "pleased that Citigroup has today confirmed that it was involved in a half-a-billion (dollar) loan to Mr. Ebbers, a relationship that Citigroup had not previously disclosed."

Before filing for bankruptcy-court protection in July amid discoveries of accounting fraud, WorldCom was a major investment-banking client of Citigroup's Salomon Smith Barney brokerage unit, whose analysts had recommended the stock to investors even as its financial condition deteriorated. In the class-action complaint filed Friday in a New York federal court, Mr. McCall trustee of the lead plaintiff in the case, the New York State Common Retirement Fund said the loans to Mr. Ebbers' Joshua Timberlands LLC created conflicting interests for Citigroup.

In its statement, Citigroup said "allegations that there was some impropriety in Travelers' loans to Joshua Timberland(s) are just plain wrong." The loans to Mr. Ebbers' holding company "had nothing to do with either any individuals from or the business of Salomon Smith Barney, or WorldCom stock," Citigroup said.

Citigroup also said the New York retirement fund's complaint inaccurately described details of the loans that Travelers made to Mr. Ebbers' company. Citing Mississippi state records, the suit alleged that Travelers lent Joshua Timberlands $499 million in September 1999, consisting of a $430 million mortgage loan and a second loan for $69 million. It also alleged Travelers lent Mr. Ebbers' company an additional $180 million in February 2000.

A "financing statement" filed with the Mississippi secretary of state's office refers to a Feb. 15, 2000, amended agreement between Mr. Ebbers' company and Travelers Insurance Co. that covers a $430 million mortgage loan and a $69 million second-mortgage loan. A second financing statement, filed in February 2000, refers to a $180 million loan from Travelers Insurance to Joshua Timberlands. Based on those records, the lawsuit alleged that Travelers had lent Joshua Timberlands a total of $679 million in 1999 and 2000.

In its statement, Citigroup said the loan amounts were incorrect. Of the $499 million that Mr. Ebbers' company borrowed in 1999, Citigroup said its Travelers units lent Mr. Ebbers' company $134 million, consisting of an $82 million loan from its Travelers Life and Annuity unit and a $52 million loan from Travelers Property Casualty. Citigroup said it was a participant with three other major insurance companies in lending the $499 million.

A Citigroup executive said the complaint double-counted the $180 million referenced in the February 2000 financing statement and that the amount actually was a subset of the $430 million mortgage loan made in 1999. The executive said Travelers structured the $499 million loan package, led the deal, and arranged for the other three insurance companies to participate.

Responding to questions about the complaint's timing, the spokeswoman for Mr. McCall, who is running for governor, noted that the fund's lawyers had asked for an additional 60 days to file the complaint, after the November election, but that their request was denied by the judge in the case, who set Friday's deadline.

R. David Kaufman, a lawyer for Mr. Ebbers, said he hadn't yet reviewed the lawsuit and couldn't comment. A WorldCom spokesman declined to comment.

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