Citigroup today agreed to pay $2.65 billion to investors in WorldCom, the failed telecommunications company that plunged into bankruptcy amid a massive accounting scandal, in one of the largest securities fraud settlements on record.
The world’s largest financial company also said it was going to increase its reserves to cover the anticipated costs of settling legal cases related to Enron and other fraud lawsuits. That reserve fund will now total a whopping $6.7 billion.
New York-based Citigroup and its Solomon Smith Barney unit have been dogged by their roles in helping finance the rapid expansion of Worldcom, now known as MCI, and Enron, two companies whose failures exposed the financial excesses of the 1990s.
Citigroup was Worldcom’s main investment banker and helped the telecommunications company raise $17 billion in two stock offerings. Solomon Smith Barney securities analyst Jack Grubman continued to issue favorable ratings on Worldcom only a few months before the company filed for bankruptcy protection.
Investors in the class-action lawsuit charged that Citigroup and Solomon Smith Barney misrepresented Worldcom’s financial condition.
“It is important that we put this unfortunate chapter behind us so we can focus on our continuing prospects for growth,” said Citigroup Chief Executive Charles Prince in a statement. “Today’s settlement is a milestone event in that effort.”
Under the agreement, Citigroup will make payments to investors who purchased publicly traded Worldcom stock or bonds between April 29, 1999 and June 25, 2002.
Citigroup said that it did not violate any laws, but decided to settle “to eliminate the uncertainties, burden and expense of further protracted litigation.”
The company said that the WorldCom settlement and the increase in its litigation reserves will result in a $4.95 billion after-tax charge against earnings in the second quarter of 2004.
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