University of California, hit with $353 million in stock losses from the collapse of WorldCom Inc., has withdrawn from a federal class action lawsuit against the bankrupt communications giant and is instead pursuing legal action on its own.
A securities fraud suit filed Thursday in San Francisco County Superior Court accused financial services firm Salomon Smith Barney, its parent company, Citigroup Inc., and accounting firm Arthur Andersen of being involved in WorldCom’s collapse.
The 91-page suit claims the defendants deliberately misled investors on the true financial state of WorldCom, duping unwitting backers with false claims of stability and economic growth.
The nine-campus university system was heavily invested in WorldCom, having purchased 10.2 million shares of the long-distance company between 1998 and early 2000.
“Since 1994, WorldCom has been a house of cards waiting to collapse,” the suit says. “It had financed its growth through a series of mergers and acquisitions which allowed it to manipulate its financial statements and inflate revenues. Rather than having true growth, WorldCom only appeared to be successful because of the defendants’ scheme to defraud.”
WorldCom Inc. and its officers are not named in the suit.
“The (UC) regents believe, as alleged in the complaint, that the defendants in this case allowed WorldCom to prey upon the public,” said Joseph Cotchett, an attorney with Cotchett, Pitre, Simon & McCarthy, which is representing UC in the case. The Burlingame-based law firm specializes in securities litigation.
WorldCom, the nation’s second-largest long-distance company, admitted in June it had improperly booked $3.8 billion in expenses as capital expenditures to boost cash flow. The announcement led to the collapse of the company’s stock price and its eventual bankruptcy, the largest in U.S. history.
WorldCom’s bankruptcy filing listed more than $107 billion in assets, according to published reports.
WorldCom has since announced additional improprieties that amounted to a $9 billion accounting scandal.
UC sold off its worthless stock, some of which had been purchased through Salomon Smith Barney, for a big loss in June and July. The suit claims that Smith Barney’s chief telecommunications analyst, Jack Grubman, wrote unrealistically positive research reports on WorldCom so that his company would receive most of WorldCom’s investment banking business.
“We’re familiar with the allegations,” a Salomon Smith Barney spokeswoman said Thursday, “and believe them to be without merit.”
The suit claims Arthur Andersen participated in the duplicity by submitting unqualified audits on WorldCom and providing tax and consulting advice.
An Arthur Andersen representative did not return a call for comment.
Hundreds of other investors took a bath over WorldCom’s demise, as well, and have joined in a federal class-action lawsuit in New York. UC regents voted Jan. 16 to withdraw from that case and pursue legal action on their own, saying they will be able to recoup a larger award from the separate suit. Also, the state suit will travel through the legal system faster than the federal action.
UC treasurer David Russ said the system’s loss, while substantial, represented only 0.7 percent of UC’s investments. Employee retirement benefits and university endowments weren’t affected, he said in a statement.
“Nonetheless, we feel a strong obligation to recover funds that rightfully belong to the university and its employees,” he said.
As of Dec. 31, UC’s diversified portfolio, which includes pension, retirement and endowment funds, was valued at $49.9 billion.