Citigroup Inc. (C) agreed to settle a class-action lawsuit with investors of WorldCom Inc. (WCOEQ), a move that will lead it to take a second-quarter charge of $4.95 billion, or 95 cents a share.
In a press release Monday, the banking giant also said it would also increase its litigation reserves.
Citigroup said that pretax reserves for its remaining exposure to other legal cases, including those related to Enron, were now $6.7 billion.
The WorldCom suit focused on Citigroup’s Salomon Smith Barney unit and its star telecom analyst Jack Grubman, who was known for touting WorldCom stock until days before the telecommunications company collapsed in an accounting fraud.
The suit’s lead plaintiff was New York State Comptroller Alan Hevesi, who is also a trustee of the New York State Common Retirement Fund.
The suit alleged, among other things, that Citigroup and Salomon granted WorldCom Chief Executive Bernard Ebbers large loans and access to stock offerings in exchange for investments banking business.
Citigroup and Mr. Grubman, as well as other defendants in the suit, have previously denied the accusations, according to The Wall Street Journal.
Under the terms of the settlement, Citigroup will pay $1.64 billion, or $2.65 billion before tax, to settle the case with the plaintiffs people who bought WorldCom securities between April 29, 1999 and June 25, 2002. The payment will be shared by bondholders and stockholders. The amount will also cover attorneys fees which have yet to be set.
“We are pleased that a settlement as significant as this could come together so quickly,” said Charles Prince, Citibank’s chief executive. He added, “It is important that we put this unfortunate chapter behind us so we can focus on our continuing prospects for growth.”
The settlement also prompted Citigroup to increase its legal reserves, a move that actually accounts for the majority of the $4.95 billion charge.
The reserve will increase to $6.7 billion before taxes following the WorldCom settlement.
Citigroup said the WorldCom deal led it re-evaluate its reserves specifically for suits relating to: its April 2003 settlement related to research and initial public offerings; its July 2003 settlement related to Enron; underwritings and research coverage of WorldCom; and its IPO allocation and aftermarket trading practices.
Citigroup said it now believes reserves are adequate and that it will defend itself vigorously in disputes, but also noted that litigation is inherently uncertain.
A First Call survey of 14 analysts, on average, projected Citigroup will post earnings of 97 cents in the second quarter. Last year the company earned $4.30 billion, or 83 cents a share, in the period.
According to Citigroup, the settlement states that the company denies any violation of law and agreed to settle to end uncertainty and the expense of protracted litigation.
The suit was pending in the U.S. District Court for the Southern District of New York.