Citigroup Settles UC’s Suit Over WorldCom

The University of California on Thursday said Citigroup Inc. had agreed to pay it $13.25 million to settle a lawsuit arising from the bank’s role in the 2002 collapse of WorldCom Inc.

The university, which had been a WorldCom investor, did not participate in a class-action lawsuit stemming from the phone company’s $11-billion accounting fraud.

The lawsuit resulted in about $6.1 billion of recoveries for investors, including $2.58 billion from New York-based Citigroup.

“We’re pleased to see the matter resolved,” Citigroup spokeswoman Christina Pretto said.

WorldCom filed for U.S. bankruptcy protection in July 2002. It emerged as MCI Inc., which was later purchased by Verizon Communications Inc.

James Holst, the University of California’s general counsel, said the university recovered more by pursuing a separate lawsuit than it would have as a member of the class.

The university filed its lawsuit in February 2003 in San Francisco County Superior Court.

Like many other investors, the university contended that Jack Grubman, the former star telecommunications analyst at Citigroup’s Salomon Smith Barney unit, issued unreasonably positive research reports on WorldCom in exchange for winning investment banking business.

The university said it bought 10.2 million shares of WorldCom and related securities from 1998 to early 2000.

It said it bought most of these shares before WorldCom’s fraud. This meant that most of its losses did not fit within claims in the class-action lawsuit.

The university sold its WorldCom holdings in June and July 2002.

Arthur Andersen, WorldCom’s former accountant, remains a defendant in the university’s lawsuit.

Citigroup has split its investment banking and research operations.

It also agreed to pay $400 million in a $1.4-billion regulatory settlement in April 2003 involving 10 banks accused of issuing biased research.

Regulators fined Grubman $15 million and banned him from the securities industry.