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Montana Sues Over Loss From WorldCom Bonds

Nov 8, 2002 | AP

Attorney General Mike McGrath filed a lawsuit Thursday to recover what he said is a $15 million loss to the state because of its purchase of bonds issued by the bankrupt telecommunications giant WorldCom.

The suit, filed in state District Court here, names several WorldCom executives and some financial institutions allegedly involved in the company's $9 billion accounting scandal revealed earlier this year.

"Like thousands of other investors, the Montana Board of Investments was led to believe that WorldCom was a healthy company and a solid investment," McGrath said. "And, like thousands of other investors, through no fault of its own, the board lost millions of dollars."

Earlier this week, the Securities and Exchange Commission announced it has expanded fraud charges against the company, as WorldCom raised its estimate of inflated earnings to more than $9 billion.

WorldCom announced $4 billion in financial misstatements in late June, shocking a market already rocked by revelations of accounting irregularities at the energy trading company, Enron. That estimate later was raised by the company to around $7 billion.

The company, the nation's second-largest provider of long-distance telephone service through MCI, took pains this week to reassure customers that the additional restatements "have no impact on its ability to continue to provide service" or to emerge from bankruptcy protection, which it expects to do in mid-2003.

The board holds WorldCom bonds that were purchased for $13.7 million in 1998, but would be worth $15 million if they matured by 2028, said Bob Bugni, an investment officer for the Board of Investments.

The board has reduced the book value of the bonds to $6 million, but they would be worth just $3 million if sold today, he said.

"We still expect the company to emerge from bankruptcy somewhere down the road," but even then the bonds may not be worth much more than $3 million, Bugni said.

The state's suit accuses WorldCom, some directors and executives, and its auditors and investment bankers with violating federal securities law that demands those offering securities for sale be truthful with investors.

The complaint alleges the defendants filed false and misleading securities registration statements and that the company used various accounting tricks to appear more profitable than it really was. In addition, the company inflated its assets, net worth and cash flow, the suit said.

Among the defendants are bankers, accountants and underwriters that put together the bond sale. They include the accounting firm of Arthur Andersen, which was involved in the Enron accounting scandal; Salomon Smith Barney; JP Morgan Securities; CitiGroup; and Lehman Brothers.

"The odds of getting our money back is good because these companies are all ongoing legitimate companies, well-financed and have significant insurance assets," McGrath said.

The suit contends that the Board of Investments relied on bad information in deciding to buy the bonds. "There is no way the board could have known the degree of WorldCom's deception," McGrath said.

"The only good news for us is that it's not a relatively big bond position," Bugni said, noting that bond purchases of $50 million are not uncommon for the board.

Bugni said the WorldCom bonds are a small portion of the $2.8 billion in bonds held by the state. Montana's total investment portfolio is about $9 billion.

The board sold all its WorldCom stock last January, six months before news of the accounting problems surfaced.

The 1.35 million shares were purchased for $42 million and sold for $13 million. The $29 million loss could have been worse, since the stock was worth less than $1 million when the bookkeeping scandal was disclosed in June.

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