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Pension Funds Sue WorldCom's Bankers

State, City Managers Seek Millions Lost In Investments

Dec 3, 2002 | Milwaukee Journal Sentinel

The pension funds for Wisconsin and Milwaukee public employees filed a lawsuit against WorldCom Inc.'s investment bankers Tuesday, accusing them of using false financial information to help sell the telecommunication company's bonds to investors.

The State of Wisconsin Investment Board and City of Milwaukee Employes' Retirement System filed the lawsuit in Dane County Circuit Court in Madison. Pension funds in at least six other states have filed similar suits.

The lawsuit says the state pension fund lost almost $38 million and the city pension fund lost about $9.5 million on WorldCom bonds. The lawsuit seeks recovery of those losses.

The lawsuit alleges WorldCom and its investment banks raised billions of dollars through public offerings of investment-grade bonds that were sold with prospectuses and registration statements containing false information. The lawsuit says money raised from selling bonds to the public was used to pay off short-term debt and release the investment banks from billions of dollars of lending commitments they had issued to back up WorldCom's short-term debt.

The suit also contends some investment banks failed to disclose to investors that they had preferentially allocated coveted initial public offering shares to WorldCom executives in exchange for being named the underwriters for WorldCom bond offerings, which netted them millions in underwriting fees.

WorldCom, which has admitted overstating its income by $9 billion and is currently in bankruptcy, is not named in the lawsuit.

The suit says the investment banks violated the federal Securities Act of 1933 in describing strong revenue and profit growth for WorldCom when touting its bonds.

The lawsuit cites a May 2001 "roadshow" visit to Milwaukee in which WorldCom was presented as "committed to conservative finances and targeting an 'A' rating on its debt to protect bond holders." Representatives of both the state and city pension funds attended that session, the suit says.

Named as defendants in the suit are Citigroup Inc. and its Salomon Smith Barney Inc. investment banking unit; J.P. Morgan Chase & Co.; Bank of America Corp.; ABN Amro Inc.; Deutsche Bank AG; Lehman Brothers Holdings Inc.; Credit Suisse Group; Goldman Sachs Group Inc.; Nationsbanc Montgomery Securities; UBS Warburg; and accounting firm Arthur Andersen.

Andersen is accused of providing audit opinions on false WorldCom financial statements that were used to market the bond offerings to public investors.

Dan Noonan, a spokesman for Citigroup's Salomon Smith Barney, said the underwriters "conducted thorough due diligence in connection with WorldCom's bond offering, including reliance on the company's audited financial statements."

"The federal securities laws make clear that underwriters may properly rely on financial statements that have been certified by the company's accountants," Noonan said.

Lehman spokeswoman Hannah Burns declined to comment, as did Goldman spokeswoman Andrea Rachman, UBS spokesman David Walker, Bank of America spokeswoman Shirley Norton, Credit Suisse First Boston spokeswoman Victoria Harmon and Deutsche Bank spokesman Ted Meyer. WorldCom spokeswoman Julie Moore declined to comment.

Patrick Dorton, a spokesman for Andersen, rebutted the allegations, saying, "It is virtually impossible for auditors to detect purposeful deception such as that perpetrated by the WorldCom top executives."

The Wisconsin pension fund manages more than $56 billion. The Milwaukee pension fund manages about $3.4 billion.

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