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Fund Sues Ebbers, Citigroup

N.Y. Complaint Cites Loan Made To Company of WoldCom's Ex-CEO

Oct 15, 2002 | Bloomberg News

Citigroup Inc.'s insurance unit loaned $679 million in 1999 and 2000 to a company controlled by Bernard Ebbers, WorldCom Inc.'s then chief executive, creating a conflict of interest for the bank, a shareholder lawsuit says.

New York State Comptroller H. Carl McCall, trustee of the New York State Common Retirement Fund, filed the complaint against Citigroup and Ebbers Friday on behalf of the fund and all other shareholders suing WorldCom for securities fraud. Citigroup denied any wrongdoing in making the loans and disputed loan details in the complaint.

The suit contains the latest shareholder and prosecutor accusations that the biggest financial services company offered favorable deals to executives of companies, including WorldCom, in exchange for investment-banking business. Several months after Ebbers's company received the loans, WorldCom selected Citigroup to arrange $17 billion in bond sales.

''It's just another smoking gun,'' said John Krause, an analyst at Thrivent Financial, which owned at least 647,571 WorldCom shares as of June 30. ''It shows there are reasons that Citigroup had to hype the stock.''

Sanford Weill, Citigroup chairman, is moving to settle investigations by lawmakers, regulators, and prosecutors into conflicts of interest between his bank's investment banking and research units that have contributed to a 36 percent drop in Citigroup shares this year.

Weill's plan of combining corporate-lending, retail-brokerage, and investment-banking businesses has attracted prosecutor and congressional investigations and shareholder lawsuits. Those investigating or suing Citigroup say it can't wear all its different business hats without favoring one set of clients over others.

Citigroup agreed Sept. 23 to pay $5 million to settle National Association of Securities Dealers charges that former analyst Jack Grubman of its Salomon Smith Barney unit misled investors by recommending shares of Winstar Communications Inc. as the telecommunications company was sliding into bankruptcy.

Shareholders of more than 300 Internet-related companies have alleged Citigroup and other banks allocated shares of high-demand initial public offerings to executive clients, such as Ebbers, in hope of winning investment bank business.

The Citigroup loans to Ebbers's company, Joshua Timberlands LLC, were allegedly secured by WorldCom stock he owned, the lawsuit said. That gave Citigroup and its Salomon analyst Grubman an incentive to promote WorldCom's stock to keep its price high, McCall said in a statement. McCall, a Democrat, is running for governor of New York in the Nov. 5 election against Republican incumbent George Pataki.

Citigroup denied the charges. The bank said in a statement that its Travelers insurance unit loaned Ebbers's company $134 million of a $499 million loan package - not one totaling $679 million. The Travelers amount, it said, was ''fully secured by timber property and contracts, not WorldCom stock.'' The $499 million in loans were arranged with three other major insurance companies that Citigroup did not name.

Two Travelers entities, Travelers Life and Annuities and Travelers Property Casualty, lent $82 million and $52 million to Joshua Timberland, respectively, the statement said.

Travelers is the only insurance company named on a ''financing statement'' filed in Mississippi regarding Ebbers's purchase of the real estate. That document, cited in the lawsuit, refers to a Feb. 15, 2000 amended agreement between Ebbers's company and Travelers that covers two ''mortgage'' loans of $430 million and $69 million - or $499 million.

An amendment, filed Feb. 18, says the financing statement ''shall also pertain to a $180 million loan'' between Ebbers's company and Travelers.

Yesterday evening, John Hancock Financial Services issued a statement in response to inquiries about loans it made to Joshua Timberland.

The company said it loaned $200 million to Joshua Timberland as part of an approximately $500 million syndicated loan originated by Travelers. Hancock said that the loan is secured by 400,000 acres of timberland owned by Joshua Timberland and not by WorldCom stock or any other assets owned by Ebbers.

McCall, whose fund was named lead plaintiff in August, alleged Travelers lent Ebbers's entity $499 million in 1999 and another $180 million in 2000.

Reid Weingarten, Ebbers's lawyer, did not return calls seeking comment.

The Travelers loans were made to fund the purchase of 460,000 acres of real estate in Alabama, Tennessee, and Mississippi, McCall's complaint said. The real estate was purchased from Kimberly-Clark Corp., which sold it for tax purposes, according to the maker of Kleenex tissue and Huggies diapers.

The lawsuit is the first filed by the New York fund as lead plaintiff against WorldCom. The pension fund was appointed in August to lead a consolidation of shareholder suits that had been filed earlier, based on WorldCom's admission in March and June that it had misstated more than $7 billion in expenses and reserves and overvalued goodwill by $50 billion.

WorldCom filed the biggest bankruptcy ever on July 21. The Securities and Exchange Commission charged WorldCom with fraud.

Telecommunications analyst Grubman, who left Citigroup after sparking lawsuits and investigations by prosecutors into whether his stock research was tainted, testified before Congress that the company earned $80 million in fees from WorldCom between 1998 and 2001. Citigroup also gave Ebbers access to shares of initial public offerings that allowed him to earn a profit of $11.6 million, according to a congressional investigation.

Grubman may have received a finder's fee for referring Ebbers to Citigroup for the Travelers loans, the complaint said. Employees who bring business to the company in a line of business outside their assigned area are typically entitled to such a fee, the complaint said, citing an unidentified former group president of Salomon. Such a fee was typically 15 percent of Citigroup's profit on the first loan, 10 percent on the second, and 5 percent on the third, the complaint said.

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