A closely held company controlled by WorldCom Inc.’s former chief executive, Bernard Ebbers, received $679 million in loans from the Travelers Insurance subsidiary of Citigroup Inc., adding to the potential conflicts of interest faced by Citigroup in its dealings with WorldCom, a lawsuit alleges.
The lawsuit portrays an even deeper financial relationship than previously disclosed between Citigroup and Mr. Ebbers. The former telecom executive also made personal profits from large stock allocations in hot initial public offerings underwritten by Citigroup’s Salomon Smith Barney investment-banking unit. And Salomon earned tens of millions of dollars in fees as an underwriter for WorldCom’s stock and bond offerings.
The complaint was filed Friday in U.S. District Court for the Southern District of New York by State Comptroller H. Carl McCall, who is trustee of the New York State Common Retirement Fund. The fund is lead plaintiff in a class-action securities suit related to the collapse in WorldCom’s stock. WorldCom last spring disclosed a massive accounting fraud, and the company, which owns the MCI long-distance telephone business, filed for bankruptcy-court protection in July.
The fund says it paid more than $300 million for WorldCom shares that are now worthless and is seeking damages from dozens of defendants. Among them are Citigroup, former Salomon telecommunications stock analyst Jack Grubman, former WorldCom auditor Arthur Andersen LLP, Mr. Ebbers and other former and current WorldCom officers, as well as 17 other former WorldCom underwriters.
The suit doesn’t provide details specifically linking the Travelers loans to business that Salomon got from WorldCom. However, it alleges that Citigroup analysts may have maintained an overly positive rating on WorldCom’s stock despite the company’s problems in part to protect Mr. Ebbers’s financial well-being so that the Travelers loans would be repaid. “Citigroup, Salomon’s parent, was on the hook for huge loans, whose value rode on the strength of WorldCom’s stock powerful incentive to make sure public perception of the Company, and its share price, did not suffer,” the complaint says.
The suit also notes that several months after Mr. Ebbers’s company received the loans from Travelers, WorldCom selected Salomon as lead underwriter for its $5 billion bond offering in 2000, and then for its approximately $12 billion bond offering in 2001.
In a prepared statement, Mr. McCall said, “Based on our investigation to date, this is yet another case of corporate coziness costing investors billions of dollars and raising troubling questions about the integrity of the information investors receive.” An attorney for Mr. Ebbers, Reid Weingarten, declined to comment on the complaint, as did a WorldCom spokesman. An attorney for Mr. Grubman didn’t return calls seeking comment. A Citigroup spokeswoman declined to comment, saying the company hadn’t seen the complaint.
The complaint comes as Salomon and other Wall Street firms are trying to reach a global settlement with state and federal regulators over conflict-of-interest allegations. Regulators say many firms issued biased stock-analyst research reports on favored banking clients and lured underwriting business from some companies by allocating shares in hot IPOs to top executives.
Similar allegations form the basis for much of the complaint by the New York retirement fund. The complaint also comes at a crucial point in Mr. McCall’s gubernatorial campaign. Recent polls have shown Mr. McCall, a Democrat, trailing Republican Gov. George Pataki.
Citing interviews with an unidentified former senior broker at Salomon, the suit claims that Mr. Grubman and others at Salomon helped Mr. Ebbers obtain $499 million in loans from Travelers in September 1999 for one of his personal holding companies, Joshua Timberlands LLC of Brookhaven, Miss. The complaint by attorneys representing the retirement fund doesn’t offer precise details of any role Mr. Grubman allegedly played in arranging for the loans. The fund is being represented by Bernstein Litowitz Berger & Grossmann LLP of New York and Barrack, Rodos & Bacine of Philadelphia.
Citing state records filed in Mississippi, the complaint says the $499 million from Travelers consisted of two mortgage loans, one for $430 million and a second for $69 million. Public records filed with the Mississippi secretary of state’s office show Joshua Timberlands was formed in August 1999.
Shortly after the loans were made, the holding company purchased 460,000 acres of timberland in Alabama, Tennessee and Mississippi for $397 million from Kimberly-Clark Co. It is unclear how Joshua Timberlands used the remaining $102 million of loan proceeds. Kimberly-Clark, a household-products maker based in Dallas, announced the transaction with Joshua Timberlands in October 1999, though it didn’t publicly disclose Mr. Ebbers’s connection to the holding company or identify its lender by name.
Citing public records filed in Mississippi, the complaint also claims that Travelers entered into an additional $180 million loan agreement with Joshua Timberlands in February 2000, bringing the total amount of Ebbers-related loans from Travelers to $679 million.
The agreements between Joshua Timberlands and Travelers are referenced in a WorldCom filing made earlier this year with the Securities and Exchange Commission. It isn’t clear from the complaint or public records whether the loans remain outstanding or what interest rates the loans carried. The loans at issue from Travelers are separate from $408 million in loans that Mr. Ebbers had received from WorldCom itself.
The complaint suggests though it doesn’t cite definitive evidence that the loans from Travelers “apparently” were secured not by the real estate that Mr. Ebbers purchased, but by Mr. Ebbers’s personal holdings in WorldCom stock. In making that suggestion, attorneys for the New York retirement fund appear to be piecing together details from several different public records on file with state agencies in Mississippi. The complaint states that those records appear to show that Travelers and Mr. Ebbers’s holding company began changing the terms of the mortgage loans so that the collateral originally pledged for the loans no longer would be fully pledged. The complaint also cites an August article in the Birmingham News of Alabama, which reported that Mr. Ebbers pledged his WorldCom shares to obtain the loans that Joshua Timberlands used to buy the acreage; the article didn’t identify the lender.
According to a person familiar with the matter, the former senior Salomon broker cited in the complaint but not identified by name is Philip L. Spartis, who handled brokerage accounts for several top WorldCom executives. Mr. Spartis currently is suing Citigroup on the grounds that he was wrongfully fired, a claim that the bank disputes.