A shareholder lawsuit charges Citigroup officials “averted their eyes” to WorldCom’s financial frauds in order to protect $679 million in loans to the telecom’s ex-CEO, Bernard Ebbers.
The lawsuit, filed in U.S. District Court in Manhattan, portrays a closer financial relationship than previously revealed between Citigroup and Ebbers, now under investigation in WorldCom’s collapse.
Citigroup issued a statement Monday calling the accusations “just plain wrong,” and said the lawsuit misstates both the size of the loans and other crucial details.
The lawsuit was filed Friday by state Comptroller H. Carl McCall, the sole trustee of the state and local government pension fund.
The fund was appointed lead plaintiff in August in a class-action securities suit related to the collapse in WorldCom’s stock. WorldCom filed for bankruptcy in July after officials admitted the company hid billions of dollars in expenses.
The new complaint claims “secret loans on the order of $679 million from the Citigroup subsidiary Travelers Insurance Company” were made to an Ebbers-controlled company called Joshua Timberlands LLC, which the lawsuit claims was nothing more than a shell corporation established to hide the connection to Ebbers.
Ebbers used the money to buy 460,000 acres in Alabama, Tennessee and Mississippi for his personal use, the lawsuit charges.
The loans were secured by WorldCom stock, giving Citigroup a huge financial incentive to keep the share price high, according to the lawsuit.
But as WorldCom began losing huge sums of money in late 2001, officials at the telecommunications company decided to hide over $7 billion in its books to make the company appear profitable.
“This scheme was simple to perpetrate and even easier to discover,” the lawsuit charges, “had the gatekeepers for the investing public the auditors, underwriters and ostensibly independent research analysts not averted their eyes.”
As WorldCom’s fraud grew exponentially into 2002, a top analyst at Citigroup’s Salomon Smith Barney unit continued to tout WorldCom as a great investment.
“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,” according to the complaint.
Citigroup said McCall was wrong on a number of counts and denied acting improperly. In a news release, the company said the loans were made with three other insurance companies, not for $679 million, but for $499 million, of which Travelers had approximately $134 million.
The loans “were and are fully secured by timber properties and contracts, not WorldCom stock,” the company said. “The financing had nothing to do with either any individuals from or the business of Salomon Smith Barney, or WorldCom stock.”
The suit by McCall’s office also says that several months after Ebbers’ company received loans from Travelers, WorldCom selected Salomon as lead underwriter for its $5 billion bond offering in 2000, and its $12 billion bond offering in 2001.
Ebbers also allegedly gained personally from large stock allocations in initial public offerings underwritten by Citigroup’s Salomon Smith Barney investment-banking unit. Salomon earned tens of millions of dollars in fees as an underwriter for WorldCom’s stock and bond offerings.
Ebbers’ civil attorney, David Kaufman, had no comment on the complaint.