The University of California announced Thursday it will receive
$13.25 million in a settlement with Citigroup Inc. and its former
investment banking subsidiary, the result of a lawsuit stemming
from fraudulent actions carried out by the telecommunications
company WorldCom.
The UC filed a lawsuit against Salomon Smith Barney, Citigroup
Inc. and Arthur Anderson LLP in 2003 alleging that the companies
contributed to WorldCom’s eventual financial collapse.
Arthur Andersen LLP, which audited WorldCom’s books,
remains a defendant in the case, according to the UC statement.
The university’s complaint alleged Salomon and its key
telecommunications securities analyst Jack Grubman traded
unreasonable positive reports on WorldCom for the lion’s
share of its investment banking business, contributing to the
inflation of WorldCom’s stock price.
“The three-year-old lawsuit was based on the fraudulent
activities that were subsequently being unraveled over the course
of half a decade, which resulted in the bankruptcy and other
financial problems for the company,” said Trey Davis,
spokesman for the UC.
The UC’s losses resulted from its purchase of 10.2 million
shares of WorldCom and related securities acquired between 1998 and
early 2000. The majority of these purchases occurred prior to the
period of documented fraud at the company.
Instead of participating as a member in the class-action
lawsuits filed under federal law, the UC decided to file its own
lawsuit under California law, as the purchase of WorldCom shares
did not entirely fall within the specifications outlined by the
federal case.
“Only 15 percent of UC’s WorldCom shares were
purchased within the federal class actions,” Davis said.
“There was a designated period of time that covered the
fraud that took place, and if you bought shares before or after
that period, they wouldn’t be included in your claim,”
he said.
The UC determined it would obtain a more favorable result by
filing a suit in California state court.
“The merits of that strategy were borne out by the result
we were able to achieve, which obtained recovery for losses that
were outside those included in the class action,” said James
Holst, the university’s general counsel, in a press
release.
Davis said the result of the lawsuit was a positive one, though
this settlement does not compensate for all the losses suffered by
the university as well as other shareholders.
“The result that we had was very favorable given the legal
options that were available to other investors that were
defrauded,” he said. “But that doesn’t take away
from the fact that the university, like other investors, lost
millions of dollars.”
Charles Prince, chief executive of Citigroup Inc., said in a
separate statement that he is pleased the matter is being resolved
so that the company can focus on the future.
“It is important that we put this unfortunate chapter
behind us so we can focus on our continuing prospects for
growth,” Prince said in the statement.