Citigroup settles WorldCom class action for $2.65bn

Citigroup, the world's largest financial services group, is paying $2.65bn (£1.5bn) to settle a class action lawsuit bought by investors in WorldCom, the US telecoms giant that went bankrupt in 2002.

Citigroup also said it had almost quadrupled its reserves for lawsuits related to its alleged role in other corporate scandals, to $6.7bn.

The New York State Comptroller Alan Hevesi, the trustee for the New York State Common Retirement Fund, the lead plaintiff in the suit, said he was also pursuing similar agreements with 17 other investment banks that could result in a further $2.8bn in money for WorldCom stock and bond holders.

The other institutions include JP Morgan Chase, which could be liable for up to $1.2bn, as well as Banc of America Securities and Deutsche Bank.

The total reserves Citigroup set aside are roughly equal to its profits during the first quarter. Citigroup, which has not admitted wrongdoing, said it would take an after-tax charge of $4.95bn, or 95 cents per share, in the current second quarter for the WorldCom settlement and increased reserves.

"I want to put the entire era behind us" Citigroup's chief executive Charles Prince said.

The lawsuit claimed that WorldCom's former chief exeuctive, Bernie Ebbers and the then-chief financial officer, Scott Sullivan, had made millions from preferential allocations of shares in IPOs managed by Citigroup's investment banking unit Salomon Smith Barney.

In return, the suit alleged, Salomon made more than $107m in investment banking fees from WorldCom. Holders of WorldCom stock and bonds were seeking $54bn for losses they claim they incurred from its $104bn bankruptcy.

Mr Prince said: "The question was do we roll the dice [with a jury trial] for $54bn or not? Our decision was to take the insurance policy."

He added: "We feel very comfortable in saying that, with our advisers helping us, we have established a reserve that will cover all of our meaningful exposures."

Last month, WorldCom - now known only as MCI - emerged from bankruptcy and shed more than $35bn in debt.

The comptroller said that that the $2.65bn Citigroup was paying - which is the second largest securities settlement after Cendant paid out $3.2bn over its accounting scandal in 2000 - would be allocated with $1.45bn to bondholders and $1.2bn to shareholders. Mr Hevesi said the other investment banks - which along with Citigroup underwrote some $17bn in WorldCom bond issues in 2000 and 2001 - have 45 days to agree to a similar settlements or face trial next January.