The University of California announced today (Apr. 6) that it will receive a $13.25 million settlement from Citigroup and its former Salomon Smith Barney subsidiary (now known as Citigroup Global Markets) in a lawsuit arising from the WorldCom Inc. securities fraud. By pursuing a separate action, the University was able to achieve a better result than what it would have received had participated as a class member in the WorldCom federal class action.

UC had filed a complaint on Feb. 13, 2003, under California securities fraud law in San Francisco Superior Court against Salomon Smith Barney, Citigroup Inc. and Arthur Andersen LLP, accusing them of being involved in the staggering financial collapse of WorldCom. UC’s complaint alleged that WorldCom, with the complicity of the defendants, engaged in a massive accounting fraud that inflated the price of its stock, damaging shareholders such as the university. 

In the wake of the collapse of WorldCom’s stock price, several class action complaints were filed and subsequently consolidated in federal district court in New York. UC chose to bring a separate suit under California law rather than participate in the federal class action, which was resolved last month, because it had California state law claims that were not pursued by the class plaintiffs.

“In this case, the University of California determined that it would likely obtain a more favorable result by filing a separate suit in California state court, asserting claims under California law,” said James E. Holst, the university’s general counsel. “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.”

UC’s losses resulted from its purchase of 10.2 million shares of WorldCom and related securities acquired between 1998 and early 2000. Because the vast majority of these purchases occurred prior to the period of documented fraud at the company, most of the University’s losses did not fit within the claims asserted in the class action . UC sold off all of its WorldCom holdings in June-July 2002 . UC’s portfolio of retirement and endowment funds currently total more than $66 billion.

The University’s complaint alleged that Salomon and its key telecommunications securities analyst Jack Grubman traded unreasonably positive reports on WorldCom for the lion’s share of its investment banking business, materially contributing to the overvaluation of WorldCom’s stock price.

WorldCom announced on June 26, 2002, that it had improperly booked $3.8 billion in expenses as capital expenditures, thereby boosting reported cash flow and profits. WorldCom subsequently announced additional accounting improprieties, resulting in more than $7 billion in restatements of its financial reports. The announcement resulted in a collapse of WorldCom’s stock price and its eventual bankruptcy, the largest in U.S. history.

Arthur Andersen remains a defendant in the case.

UC retained the Burlingame, CA-based law firm of Cotchett, Pitre, Simon & McCarthy as counsel in the case.

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