Citigroup business units lent $134 million to a company owned by former WorldCom CEO Bernie Ebbers, but the financial-services giant on Monday denied allegations that its relationship with Ebbers motivated it to publicly tout WorldCom stock.
The allegations were made in a lawsuit filed by New York state Comptroller Carl McCall, a gubernatorial candidate who controls a state retirement fund that lost $300 million on WorldCom stock. The USA’s No. 2 long-distance carrier filed for bankruptcy-court protection in July and has disclosed $7.2 billion in bad accounting.
The lawsuit adds to questions about whether Wall Street investment banks produced biased stock recommendations to curry favor with corporate clients. Citigroup owns Salomon Smith Barney.
Congressional and regulatory probes suggest that executives at investment banks’ clients got perks, such as a chance to buy shares of hot new companies. Also at issue is whether stock analysts touted clients’ stocks in return for banking business.
McCall’s lawsuit, filed Friday, names dozens of defendants, including WorldCom officers and directors, audit firm Arthur Andersen, banks such as Citigroup and Jack Grubman, the former star telecom analyst for Salomon Smith Barney.
With WorldCom protected by bankruptcy laws, plaintiffs ”look for deep pockets,” says Alan Axelrod of Bilzin Sumberg Dunn Baena Price & Axelrod.
The complaint details previously unheard allegations about loans that Ebbers’ Joshua Timberlands got from a Citigroup insurance unit starting in late 1999. It alleges that the loans, used to buy 460,000 acres of land in Alabama, Tennessee and Mississippi, were secured by Ebbers’ WorldCom stock. The loans were made near to when Salomon was chosen to help bring $17 billion in WorldCom bonds to market.
Citigroup calls the allegations ”plain wrong.” It says loans totaled $499 million, not $679 million as the lawsuit claims, and that two of its Travelers units hold only $134 million. Three other insurers hold the rest.
Citigroup says the loans were not secured by WorldCom stock, now worthless. Travelers Property Casualty says its loan is backed ”by timber properties and contracts, and is continuing to perform.”
Ebbers, ousted from WorldCom in April, owes WorldCom $408 million in loans. Some of his assets, including part of the company that owns Joshua Timberlands, secure them. His lawyer declined comment.