Citigroup faces WorldCom action

WALL STREET giant Citigroup is facing massive legal claims over the $11bn (£6.1bn) collapse of WorldCom after an official report blasted it and accountants KPMG.

A court-appointed investigation into WorldCom - the telecoms group which went bankrupt but has re-emerged as MCI - attacked the role of advisers.

It gave the go-ahead for MCI to sue former chief executive Bernard Ebbers, KPMG and Citigroup.

The report blamed KPMG for a scheme it proposed so MCI could avoid hundreds of millions of dollars in State taxes.

While MCI said it would not pursue claims against KPMG and the bespoke tax strategy its accountants provided, Citigroup, the world's largest financial services company, could face massive legal claims from MCI.

The report, by Richard Thornburgh, a former US attorney general, says Citigroup's investment banking operation helped Ebbers avoid his fiduciary duties to MCI, then known as WorldCom. It adds fellow accountants Andersen failed to spot what was evidently a fraud.

It is not yet clear if MCI will press charges against any of those named in the report. It is unlikely to recover any substantial funds from Ebbers or from Andersen, which has gone out of business. Legal costs could be substantial.

However, Citigroup offers a potentially more rewarding target. MCI bondholders and shareholders lost some $200m when it collapsed in a major accounting scandal.

One of the key accusations in the report is that Ebbers probably breached his fiduciary duty to the company by giving investment banking business to Citigroup which, in return, gave him personal financial favours such as special share allocations in red-hot initial public offerings (IPOs).

Citigroup said the report did not show its actions were linked to the accounting fraud at WorldCom, and that the bank had acted in good faith.

Since the bankruptcy, Citigroup had taken measures to eliminate conflicts of interest, such as separating its investment banking and research business, and not allocating IPO shares to chief executives, a spokeswoman said.

Andersen, which already faces lawsuits from WorldCom investors, said: 'MCI should target its former management, which not only deceived its investors but also its auditors.'

The report provides evidence that backs up accusations of management culpability. It mentions, for example, that Ebbers 'borrowed' more than $400m from MCI without warning he would not be able to repay it.

KPMG condemned the report's conclusions as 'simply wrong'.

It said the tax strategy it implemented for MCI was still in effect and was widely used by other multinational companies with overseas subsidiaries.