Given the role it played in promoting a company that collapsed under a mountain of debt, Citigroup got off easy in its recent agreement to pay $2.65-billion to investors burned by the WorldCom accounting scandal. As the second-largest settlement in a class-action securities case, the deal is notable for what it doesn't do. It doesn't come close to compensating investors for the tens of billions of dollars lost when the telecommunications giant went bankrupt. Citigroup accepted no blame. Settling the lawsuit leaves the public without a fuller understanding of what the bank knew about WorldCom's finances. Even the $2.65-billion figure is misleading, for after taking a tax write-off, Citigroup's true cost will be $1.64-billion.
Plaintiffs, led by Alan Hevesi, the New York state comptroller representing the state's pension fund, accused Citigroup of playing up WorldCom to investors as part of a broad "fraudulent scheme" designed to win WorldCom's investment banking business. In a brief filed in the case last month, Hevesi said Citigroup's research arm was reassuring investors that its analysts were independent even as company executives complained that the research "had been compromised by the drive for investment banking business."
The settlement doesn't resolve all claims against Citigroup by individual investors. Nor does it end litigation against other banks named as defendants in the case. Citigroup said it chose to settle to spare itself the time and trouble of litigation and a "roll of the dice" jury verdict, which would have left the prospect of unknown liability looming over the company. Analysts said the decision was smart business.
In the three years since the corporate accounting scandals exploded on the national scene, the major banks and securities firms have paid billions of dollars to settle charges of fraud or financial manipulation. Thanks in large part to their strong state action in New York, the world's financial center, Hevesi and Eliot Spitzer, New York's attorney general, have prodded the federal government and Wall Street to make corporate America more transparent.
Hevesi also did a good job of explaining why third parties - investment bankers and stock analysts - should shoulder some blame for the WorldCom fiasco. "They are the gatekeepers," he told the Wall Street Journal. "They have the obligation to present the most accurate picture for investors." Or put another way, if both can profit, both can pay.
