The University of California will file an action under California securities fraud law on its behalf in California Superior Court against WorldCom Inc. officers and directors; Salomon Smith Barney and/or its parent Citigroup Inc; and WorldCom’s auditor, Arthur Andersen LLP. UC’s Board of Regents authorized the move at its meeting in San Francisco today.
In the wake of the collapse of WorldCom’s stock price, several class action complaints were filed and subsequently consolidated in federal district court in New York City, with the New York State Comptroller as lead plaintiff. UC is currently a class member in that case.
The university has determined that it should bring a separate suit rather than participate in an on-going federal class action in New York.
”Each securities case must be evaluated independently to determine whether class action or separate litigation is in the best interest of the university’s investment funds,” said James E. Holst, the university’s general counsel. ”While we believe that class action treatment is often preferable, in this case the University of California will likely obtain a more favorable result by withdrawing from the federal class action and filing a separate suit in California state court, asserting claims under California law. A key factor in this determination was the size of the university’s losses on WorldCom stock.”
WorldCom Inc. announced on June 26, 2002, that it had improperly booked $3.8 billion in expenses as capital expenditures, thereby boosting reported cash flow and profits. WorldCom has subsequently announced additional accounting improprieties, resulting in more than $7 billion in restatements of its financial reports. The announcement resulted in a collapse of WorldCom’s stock price and its eventual bankruptcy, the largest in U.S. history.
UC’s losses totaled in excess of $353 million, based on 10.2 million shares of WorldCom and related securities purchased between 1998 and early 2000. UC sold off all of its WorldCom holdings in June-July 2002. The current value of UC’s diversified portfolio, which includes both pension and endowment funds, stands at $49.9 billion (as of 12/31/02).
”Our WorldCom losses, while substantial, represented only 0.7 percent of total funds under management,” said David H. Russ, the university’s treasurer. ”As a result, the loss will not affect the retirement benefits provided to UC retirees nor the endowment’s support of the university’s academic mission. Nonetheless, we feel a strong obligation to recover funds that rightfully belong to the university and its employees.”
Regulators have also been investigating the relationship between WorldCom and Salomon Smith Barney. Evidence has come to light suggesting that Salomon’s lead telecommunications analyst, Jack Grubman, wrote unrealistically positive research reports on WorldCom in exchange for WorldCom providing Salomon with the lion’s share of its investment banking business. Given Grubman’s role as the foremost telecommunications securities analyst, these positive evaluations inflated the market price of WorldCom stock.
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