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Articles: Citigroup takes $5 billion charge

Posted by admin on Monday, May 10, 2004 - 11:46 PM

NEW YORK (CBS.MW) -- Citigroup surprised Wall Street Monday by announcing a charge of almost $5 billion to shut the books on charges it misled WorldCom investors, and to beef up reserves for future, similar settlements.
Citigroup (C: news, chart, profile), the nation's largest bank, settled with WorldCom investors for $2.65 billion, or $1.64 billion after tax. The class action lawsuit charged that Citi misled investors while the disgraced telecom giant was engaging in accounting violations. New York State Comptroller Alan Hevesi, the court-appointed representative for plaintiffs in the case, said in an interview with CBS MarketWatch that the $2.65 billion figure marks the second-largest shareholder settlement in history, smaller only than a $3.2 billion deal with Cendant in 2000. "They're going to be satisfied with the settlement," Hevesi said when asked about shareholder reaction. "It was a courageous thing for Citigroup to do. They were not keen on the prospect of a six-week trial." For his part, Citigroup CEO Charles Prince said Monday the company's "taking a leadership position in bringing to a close this difficult era in the history of our industry and our company." The balance of the $4.95 billion after-tax charge will be added to Citigroup's reserves for future settlements, and brings that kitty to $6.7 billion. Prince says most of that reserve is earmarked for Enron litigation. Shares of Citigroup, a Dow industrials component, dropped 2.8 percent to close at $45.41 in Monday trading. Grubman and Citi's 'unfortunate chapter' Citigroup stopped short of acknowledging wrongdoing, saying it agreed to the payment "solely to eliminate the uncertainties, burden and expense of further protracted litigation." "It is important that we put this unfortunate chapter behind us so we can focus on our continuing prospects for growth," Prince said in a written statement. The suit alleged wrongdoing against Citigroup as well as its former star telecom analyst Jack Grubman, who resigned from Citigroup's Smith Barney unit in August 2002. Grubman, who was also involved in investment banking, was among WorldCom's biggest fans during the late 1990s telecom boom. He touted the stock until just a few months before WorldCom admitted to billions of dollars in accounting misdeeds, a revelation that triggered claims that Grubman deceived investors. Prince cited the role of Hevesi, who agreed last week to hold talks to negotiate a settlement between shareholders and the company. Size of charges a surprise "As a result of this settlement, we now have a better understanding of our remaining exposure for Enron and other litigation related to the 2003 regulatory settlements and have adjusted our reserves accordingly," Prince said. That surprised many on Wall Street, who thought the company had a better handle on its likely expenses. Prudential analyst Mike Mayo downgraded the stock to "neutral weight" from "overweight" partly because Citigroup had previously maintained that its litigation reserves were adequate "This not only reduces management credibility somewhat (esp. with another SEC investigation related to Latin America) but also reduces the amount of excess capital that Citi has available for acquisitions," said Mayo, who referred to a fresh probe into Citigroup's Argentina accounting last week. See full story. Standard & Poor's said its 'AA-' rating on Citigroup's long-term debt would not be impacted by the WorldCom settlement. The settlement, and the steps to raise reserves to $6.7 billion, "are admittedly larger than S&P expected would be necessary to cover the legal costs stemming from its dealings with Enron and WorldCom," S&P said in a statement. "Nevertheless, they are well within the corporation's power to cover out of a quarter's earnings." An 'insurance policy' for Citi In a conference call with Wall Street analysts, Prince said the settlement represented an "insurance policy" against a potential $54 billion risk if the case had gone to trial as scheduled next year. The settlement was reached ahead of a key hearing on Monday. Prince said the WorldCom case "arose in a different era" prior to banking reforms. Prince, who has a legal background, said the "current litigating environment is one that is hard to have optimism about an outcome" in such a case. The settlement is tax deductible, Citigroup noted. Boosting reserves In connection with the settlement, the company said it has re-evaluated its reserves for "numerous lawsuits and other legal proceedings," including: The April 2003 settlement of the research and IPO spinning-related inquiries conducted by the Securities and Exchange Commission, the National Association of Securities Dealers, the New York Stock Exchange and New York Attorney General Eliot Spitzer. The July 2003 settlement of the Enron-related inquiries conducted by the SEC, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency and Manhattan District Attorney Robert Morgenthau. Underwritings for, and research coverage of, WorldCom; and the allocation of, and aftermarket trading in, securities sold in initial public offerings. "The company believes that this ($6.7 billion) reserve is adequate to meet all of its remaining exposure for these matters," Citigroup said. "However, in view of the large number of these matters, the uncertainties of the timing and outcome of this type of litigation, and the significant amounts involved, it is possible that the ultimate costs of these matters may exceed or be below the reserve."

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