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Citigroup Fined for WorldCom Advice

NYSE Says Workers Were Not Warned

Aug 23, 2003 | Washington Post

The brokerage division of Citigroup Global Markets Inc. has been fined $1 million by the New York Stock Exchange, ending a two-year investigation into allegations that an Atlanta branch improperly advised WorldCom Inc. employees on matters related to their company stock holdings.

The NYSE contends that the branch advised WorldCom employees to borrow heavily to pay taxes on stock options but did not warn them of potential losses if the value of their holdings fell. The stock of WorldCom, which filed for bankruptcy last year, is now worthless.

Citigroup's Salomon Smith Barney division was authorized by the company to advise WorldCom employees on their stock holdings. The arrangement provided Citigroup with millions of dollars in fees and access to more than 70,000 WorldCom employees.

"We are pleased to have the matter resolved," a Citigroup spokeswoman said yesterday. WorldCom, which now does business under the name of its MCI subsidiary, declined to comment on the NYSE decision. The Wall Street Journal first reported the NYSE's action yesterday.

Michael J. Grace, the branch's former manager, stepped down in December of 2001 after the NYSE initiated the investigation. Grace is now a broker with Citigroup in Atlanta.

The NYSE claimed that WorldCom employees were sometimes advised to borrow money to pay taxes resulting from the exercise of stock options. When employees exercise options, they owe tax on the difference between their costs and the market price. The Atlanta office often suggested that employees hold the stock and borrow to pay their taxes that way, employees could lock in even greater profits if the stock rose.

However, the NYSE said the employees were not warned about what might happen if the stock plummeted and employees could no longer rely on exercising their shares to repay the loan. Many employees were stuck with tens of thousands of dollars in loans in addition to their share losses, the NYSE said.

WorldCom filed for bankruptcy protection last year after disclosing a massive accounting scandal. The company is planning to emerge from bankruptcy later this fall.

The NYSE's investigation found that the improper advice was limited to a single branch of the brokerage division and was not a systemic problem within Citigroup. Earlier this year, the company paid a $400 million fine to settle charges that its analysts were pressured to issue favorable ratings for investment banking clients.

Former Citigroup star analyst Jack Grubman had close ties to some of WorldCom's top executives and sometimes attended the telecommunications company's board meetings. Grubman maintained a positive rating on WorldCom shares even as they tumbled from their high of more than $90 to less than $5.


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