Citi to pay $2.65 billion settlement

NEW YORK — In one of the largest securities fraud settlements ever, financial services giant Citigroup Inc. has agreed to pay $2.65 billion to settle a class action suit brought by investors who bought WorldCom Inc. securities before the telecommunications company went bankrupt in 2002.

It was the second-biggest settlement of a securities class action case ever, after a $3.2 billion settlement by services giant Cendant Corp. in 2000 over accounting fraud that cost shareholders billions, according to New York state Comptroller Alan Hevesi.

And the deal with Citi is just the first step, Hevesi said Monday in announcing the settlement.

The comptroller, who is taking the lead in the class action case, said he was pursuing similar agreements with 17 other investment banks that could result in a further $2.8 billion in money for WorldCom stock and bond holders.

The other institutions include J.P. Morgan Chase & Co., which could be liable for up to $1.2 billion, as well as Banc of America Securities and Deutsche Bank AG, he said.

Hevesi said the other investment banks — which along with Citi underwrote some $17 billion in WorldCom bond issues in 2000 and 2001 — have 45 days to agree to a settlement similar to Citi’s or face trial next January.

“This is not the end of our third-party litigation,” Hevesi said in pledging to pursue all legal remedies against the institutions that backed WorldCom.

Citigroup’s brokerage division was a key backer of WorldCom securities before the telecoms firm filed for the biggest bankruptcy in history in July 2002 amid accounting irregularities. Last month, the company — now known only as MCI — emerged from bankruptcy and shed more than $35 billion in debt.

Hevesi said that the $2.65 billion Citi is paying would be allocated with $1.45 billion to bondholders and $1.2 billion to shareholders.

He and the state’s attorneys declined to say what investors total losses were or what percentage the settlement represented of those losses, saying that the size of the class was still an issue and valuing losses was complicated.

Lawyers’ fees will also come from the settlement amount.

Citi’s shares fell $1.31, or 2.8 percent, to close at $45.41 on the New York Stock Exchange.

The settlement — which was negotiated by Citi chief executive Charles Prince and approved by the Citi board over the weekend — covered allegations of misconduct by Citi and its investment divisions as well as former star telecoms analyst Jack B. Grubman.

Grubman, who worked at Salomon Smith Barney in the late 1990s, was fined $15 million and permanently banned from the securities industry last year for what regulators called “fraudulent, misleading, and otherwise flawed research reports.” Citi has since reorganized its investment divisions to segregate analysis from investment banking operations.