UC Sues Firms With WorldCom Ties
A month after withdrawing from a federal class-action lawsuit against WorldCom Inc., the University of California sued three financial firms Thursday in an effort to recoup $353 million in stock losses.
Named in the suit were financial services company Citigroup Inc. and its Salomon Smith Barney brokerage unit, along with accounting firm Arthur Andersen.
The suit, filed in San Francisco Superior Court, accuses the firms of conspiring to hide the failing financial health of WorldCom, once the No. 2 U.S. long-distance phone company, from investors and federal regulators.
According to the suit, the financial companies ignored widespread illegal practices at WorldCom, such as double booking of sales and barter transactions that allowed the company to improperly recognize revenue and thus keep its stock price from falling.
“The defendants knew that if WorldCom’s value declined, they would lose their lucrative fees and Citigroup would not be repaid its loans,” the lawsuit said.
WorldCom filed for bankruptcy protection in July, saying it had improperly booked expenses to boost cash flow and profit as part of a $9-billion accounting scandal.
Salomon was WorldCom’s primary investment banker, helping WorldCom raise more than $17 billion in two public offerings and providing investment advice to the company, the suit said.
The brokerage also administered WorldCom’s employee stock-option plan and, through former high-profile analyst Jack Grubman, continued to issue favorable ratings on WorldCom stock until three months before the company filed for bankruptcy protection, the suit said.
Grubman, who once flaunted his close ties to telecom executives, in December settled with regulators for $15 million and a lifetime ban from the securities industry.
Andersen was named in the suit because it audited WorldCom’s books from 1993 to 2002.
Citigroup and its divisions, in concert with other lenders, helped WorldCom finance its acquisitions of companies with loans and revolving credit totaling $5 billion, the suit said.
A spokesman for Andersen on Thursday denied responsibility for the university’s losses. “The regents should direct their fire at WorldCom management that perpetrated a massive fraud, not at the auditors who were intentionally kept in the dark,” Patrick Dorton said .
A spokeswoman for Citigroup and Salomon said the allegations were “without merit.”
The 26-member board of regents that governs California’s public university system bought 10.2 million shares of WorldCom stock between 1998 and 2000. The university, which has a $50-billion investment portfolio, sold the nearly worthless shares in July, the suit said.
The regents said they believed they would get a bigger judgment in California courts rather than as part of the federal class-action suit in New York, where the university would have to vie with thousands of others who lost money on WorldCom.
