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The cleanup after the collapse of WorldCom Inc. advanced Monday when Citigroup Inc. announced it would pay investors $2.65 billion to settle claims that one of its investment banking units helped disguise WorldCom’s accounting fraud and inflate the price of its securities. The settlement, if approved by Southern District of New York Judge Denise Cote, removes a central player from the litigation spawned by WorldCom’s revelation that it hid more than $11 billion in costs on its balance sheet. The accounting fraud led to criminal charges against WorldCom Chief Executive Bernard J. Ebbers and several other top officials, triggering the collapse of the company’s stock price. It forced the company into a bankruptcy that ended last month when it re-emerged under the name MCI. The settlement leaves 16 investment banks facing civil liability in consolidated class actions that have the New York State Common Retirement Fund as lead plaintiff, represented by Bernstein Litowitz Berger & Grossman of New York and Philadelphia’s Barrack, Rodos & Bacine. Citigroup, the parent of Salomon Smith Barney, was named in the class actions because of what plaintiffs lawyers said was an incestuous relationship between Salomon Smith Barney, its star telecommunications analyst Jack Grubman and lead executives at WorldCom. They claimed Grubman and Salomon Smith Barney aided and abetted WorldCom’s record-setting accounting fraud by making material misrepresentations in analyst reports and registration statements for public securities offerings. As part of this quid pro quo relationship, Salomon Smith Barney allegedly funneled shares in initial public offerings to top WorldCom executives and loaned Ebbers hundreds of millions of dollars — all to help ensure that WorldCom sent its investment banking business to Salomon Smith Barney. The settlement includes investors who purchased roughly $1.4 billion in WorldCom bonds issued in offerings held in May 2000 and May 2001. The remainder of the money, about $1.2 billion, covers bonds and other securities purchased between April 1999 and June 25, 2002, less than a month before WorldCom filed the largest bankruptcy in U.S history. “This is a significant development because we now have, for the first time, a group of defendants who have decided to put this sad chapter behind them and pay a significant amount of money to victimized investors,” said John B. Coffey of Bernstein Litowitz. Coffey said the other investment banks still in the litigation have been given 45 days to settle on the same terms as Citigroup. For example, should J.P. Morgan Chase decide to accept the same terms, the bank would pay somewhere in excess of $1.2 billion. Should J.P. Morgan or other investment banks, including Lehman Brothers Inc. and Goldman, Sachs & Co., decide to settle, the total amount paid to investors and their lawyers would easily clear the $3.5 billion record for securities litigation settlements set in the Cendant Corp. litigation. Cendant disclosed in 1998 that it had misstated revenues to inflate its stock price. The conspiracy and fraud trial of its former chairman and former vice chairman began Monday in Hartford, Conn. In the WorldCom matter, the investment banks are represented by Jay B. Kasner and John Gardner of Skadden, Arps, Slate, Meagher & Flom. Paul Curnin of Simpson Thacher & Bartlett represents the former WorldCom directors sued in the class actions. The settlement, Citigroup said in a statement, was facilitated by mediators Southern District Judge Robert W. Sweet and Magistrate Judge Michael H. Dolinger. New York State Comptroller Alan Hevesi, the bank said, joined in face-to-face discussions with plaintiffs lawyers on Thursday. Martin London and Richard A. Rosen of Paul, Weiss, Rifkind, Wharton & Garrison, who represented the bank, Salomon and Mr. Grubman, declined to add to that statement Monday.

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