This page describes the incestuous and self-serving role played by Citigroup bankers and analysts in the meteoric rise of WorldCom and its spectacular collapse.
Over the years, through market booms and crashes, there have been many examples of extraordinary feats of promotional sleight of hand on Wall Street, which inevitably come to tears with money lost, investors angry and campaigns of reform. Yet the case of a tiny company founded in the 1980's that grew to become the mammoth telecommunications company WorldCom stands out for the systematic salesmanship on Wall Street that fueled its rise.
It was a system animated by conflicts of interest, self-dealing and bad faith shown toward ordinary investors.
The PBS program "Frontline" examines WorldCom's rise and fall tonight in "The Wall Street Fix."
"But the real story behind WorldCom's stunning rise and fall is more sinister. It's a story of pervasive corruption here on Wall Street."
The three main targets of the program's criticism -- Mr. Grubman; Bernard J. Ebbers, the ousted chairman of WorldCom; and Sanford I. Weill, the chairman of Citigroup TELEVISION REVIEW; Creating the WorldCom Mirage The New York Times May 8, 2003
This web page is more about Citigroup than about WorldCom. What happened is revealing of the way the marketplace operated and of Citigroup's key role in what happened. WorldCom mirrors what happened at many other companies and the involvement of bankers in this.
All this occurred during the 1990s at the same time as the health care scandals. A very similar relationship existed with HealthSouth and its chairman Richard Scrushy, now charged with fraud. One must consider the likelihood that similar things could well have occurred behind the other health care scandals?
"The industry is reeling from this black mark," Jose Collazo, chief executive of Infonet, a WorldCom competitor, said in an interview.
It was as if months of accounting scandals, which have already engulfed Enron, Global Crossing and Adelphia Communications, among others, as well as the auditing firm Arthur Andersen, had finally hit critical mass with the disclosure late Tuesday that WorldCom had masked losses by overstating its financial results by $3.8 billion -- one of the largest cases of false corporate bookkeeping yet. TURMOIL AT WORLDCOM: THE OVERVIEW; WORLDCOM FACING CHARGES OF FRAUD; INQUIRIES EXPAND The New York Times June 27, 2002
Much of the concern about WorldCom relates to its close relationship with Smith Barney and particularly the friendship between Bernard Ebbers, WorldCom's chairman and Jack Grubman. This started many years before when WorldCom was in its infancy and Grubman had not yet joined Salomon brothers. WorldCom's business followed Grubman and brought great wealth to the companies Grubman worked for. Grubman attended WorlCom board meetings to advise them. Some of this relationship has already been addressed on previous web pages..
As much as any analyst, Mr. Grubman has straddled the line that is supposed to separate banking and investment research. He has boasted of his close relationship with senior executives of client companies, like Bernard J. Ebbers, the former chief executive of WorldCom. TURMOIL AT WORLDCOM: THE ANALYST; Timing of a Rating Shift Is Raising Some Questions The New York Times June 28, 2002
The rise and rise of WorldCom was a consequence of this close relationship and Grubman's role in selling WorldCom shares. In a little over 10 years a tiny startup became an industry giant before imploding. As a consequence the price of shares rose and rose so that WorldCom was able to take over company after company building itself into a US $107 billion giant. TURMOIL AT WORLDCOM: THE OVERVIEW; No Records Found to Back WorldCom's Shift of Billions The New York Times June 28, 2002
AS investigators pore over WorldCom, the telecommunications giant that collapsed in July, their work has increasingly become a study of the close and intricate relationship between it and its equally large financial partner, Citigroup. In a Broker's Notes, Trouble for Salomon The New York Times September 22, 2002
For nearly a decade, the Salomon Smith Barney unit of Citigroup has stood in the shadows behind WorldCom's meteoric rise. Salomon's bankers have done everything from whispering merger advice to promoting stock offerings to arranging billions of dollars in loans -- making more than $100 million in fees in the process. TURMOIL AT WORLDCOM: THE BANKERS; Salomon Brothers May Face WorldCom Shareholder Suits The New York Times June 29, 2002
WorldCom has been a lucrative investment banking client for Salomon in recent years. Since 1997, Salomon has managed or co-managed all 16 offerings of public debt by WorldCom, according to Richard Peterson, chief market strategist at Thomson Financial. Those deals, which raised $25 billion for WorldCom, threw off at least $75 million in fees to Salomon, Mr. Peterson estimated. Salomon also earned hefty but undisclosed fees as an adviser to WorldCom on its many acquisitions. WorldCom Causes Split In Opinion At Salomon The New York Times March 13, 2002
Mr Ebbers resigned after it was revealed that he owed WorldCom more than $366 million because of loan guarantees it had given him via Citigroup.
Another cloudy aspect of the Ebbers-Citigroup relationship is a loan that Citigroup's private bank made to Mr. Ebbers, using WorldCom stock as collateral. - - - - - the company's roughly $400 million loan to the former executive. - - - - - it would give Citigroup a reason to want to prop up WorldCom stock. More Clouds Over Citigroup in its Dealings With Ebbers The New York Times November 3, 2002
What happened at WorldCom closely follows what happened at HealthSouth where Citigroup bankers also beat up the company's prospects. To maintain the momentum and the takeovers it was imperative for both companies that profits be maintained. During the late 1990s they both systematically cooked the books.
The promised bonanza from the technology revolution was overblown by analysts and by overzealous investing consequent on the analysts' reports. This resulted in a glut of services and a fall in profits. To stay on top several of the companies resorted to creative accounting. WorldCom did so to the extent of hiding US $11 billion, the largest fraud ever followed by the largest bankruptcy.
His (Grubman) bullish opinion of the prospects of these smaller companies contributed to the formation of expectations for the industry that resulted in an overwhelming glut of communications capacity and a string of corporate failures. House to Question Executives of WorldComThe New York Times July 8, 2002
In its court filing, the S.E.C. said WorldCom violated antifraud and reporting provisions of federal securities laws by creating an accounting scheme intended to manipulate earnings to meet Wall Street's expectations and to support the company's stock price. TURMOIL AT WORLDCOM: THE OVERVIEW; WORLDCOM FACING CHARGES OF FRAUD; INQUIRIES EXPAND The New York Times June 27, 2002
"The imperative of meeting analysts' quarterly projections has trumped the interests of shareholders and, indeed, threatened the long-term prospects of the companies themselves," said John J. LaFalce of New York, the committee's highest-ranking Democrat. CORPORATE CONDUCT: THE HEARINGS; 2 Former WorldCom Executives Refuse to Testify to Congress The New York Times July 9, 2002
This fraud differed from the earlier Enron fraud in the absence of a paper trail explaining what had happened and why. A single person Mr. Sullivan, the WorldCom chief financial officer took responsibility and the blame offering his own explanations for what he did
Investigators looking into the WorldCom scandal have found no records to support decisions to shift billions of dollars in expenses on the company's books, people close to the company said yesterday -- a fact that increases the likelihood that the transactions involved criminal fraud.
Instead, investigators have found that the sums involved -- which reduced reported operating expenses over the last five quarters -- were exactly those needed for WorldCom to meet its profit margin goals, these people said.
Scott D. Sullivan, reported that he independently decided to make the expense shifts without consulting with WorldCom's former accountants, Arthur Andersen, according to people close to the company. Mr. Sullivan also implied that he had made the decision without consulting other senior executives, they said. TURMOIL AT WORLDCOM: THE OVERVIEW; No Records Found to Back WorldCom's Shift of Billions The New York Times June 28, 2002
Although Sullivan was charged with fraud it was difficult to pin it on to anyone else. Arthur Andersen, the accountants complicit in the Enron fraud and Citigroup which aided the Enron fraud could not be implicated. Perhaps it was really a one man show - or perhaps they had learned from the Enron experience and Sullivan was prepared to make the sacrifice. There are some reports suggesting that others in the company were aware that the accounts were not all they should have been.
The lack of records in support of the expense transactions was first discovered by WorldCom in the days leading up to its announcement. TURMOIL AT WORLDCOM: THE OVERVIEW; No Records Found to Back WorldCom's Shift of Billions The New York Times June 28, 2002
"There is no question, absolutely none, that a number of middle-management people at WorldCom had a very good idea that someone was cooking the books," he (Ken Johnson, a spokesman for federal investigators) said.
"It's clear to us that they tried to get to the bottom of it only to be rebuffed by Scott Sullivan." Awareness of Accounting Reuters July 12, 2003
Perhaps the most revealing evidence of the close relationship between Ebbers and Grubman is an email from Grubman 5 months before the bankruptcy when Ebbers was due to give a conference call denying rumours of financial problems, accounting irregularities and possible bankruptcy. In the email Grubman coaches him in what to say. He followed Grubman's script denying all the rumours. At the same time Grubman supported Ebbers and WorldCom strongly in his "independent" reporting.
As shares of WorldCom were falling on rumbles of a pending financial crisis a year ago, the company's founder, Bernard J. Ebbers, took to the microphone in a conference call with Wall Street analysts and swatted down rumors about the company's problems.
According to an e-mail message uncovered by securities regulators in their investigation of Wall Street research practices, Mr. Ebbers received a good deal of help with his rousing script from Jack B. Grubman, the telecommunications stock analyst at Salomon Smith Barney.
Stock analysts are supposed to offer investors independent, fair-minded opinions on the health of American companies. But this exchange reveals an unusual level of collaboration between analyst and executive and suggests that Mr. Grubman was anything but impartial about WorldCom. Analyst Coached WorldCom Chief on His Script The New York Times February 27, 2003
It is interesting that out of the blue Grubman for the first time downgraded WorldCom shares just days before they announced the fraud. He has never explained why he did this.
Mr. Spitzer said on Wednesday that the timing of Mr. Grubman's downgrade of the stock had raised eyebrows. TURMOIL AT WORLDCOM: THE ANALYST; Timing of a Rating Shift Is Raising Some Questions The New York Times June 28, 2002
- - - - Martin Weiss, chairman at Weiss Ratings Inc., an independent research firm. "He (Grubman) was clearly a leading proponent of WorldCom shares, almost to the bitter end, despite abundant signs of trouble." Bullish Analyst Of Tech Stocks Quits Salomon The New York Times August 16, 2002
With WorldCom in bankruptcy and unable to pay damages investors are turning to Citigroup, alleging complicity and blaming them for what happened - claiming damages. It remains to be seen if they will succeed. One of the problems for Citigroup is that it has loaned money to WorldCom and in doing so was required to do due diligence reviews and these should have uncovered the fraud.
The suit would be the first to compel depositions from former WorldCom chief executive Bernie Ebbers, Citigroup chairman Sanford Weill and its former star telecoms analyst Jack Grubman.
The suit blames the trio for recklessly and intentionally inflating claims about the stock's potential, making them millions while countless Americans lost money.
He (Retiree invester) called Citigroup and Salomon as early as July 1999, when his shares would have been valued at $2.1 million, and was advised that Grubman predicted the stock to break triple digits by the year's end. Retiree Loses $2 Million Life Savings, Sues For Pain Lawsuit may create way for thousands wiped out by accounting, securities fraud to seek redress Associated Press August 19, 2003
Because WorldCom issued $12 billion in bonds last year, the investment banks that underwrote that offering, Citigroup's Salomon Smith Barney unit and J. P. Morgan Chase, are also possible targets for lawsuits from investors in those bonds. - - - - - - Under the law, the underwriters, as well as WorldCom's outside directors, must have conducted their own due diligence. TURMOIL AT WORLDCOM: LIABILITY; A Long List Of Defendants With More To Be Named The New York Times June 28, 2002
Citigroup Inc. and its former telecommunications stock analyst, Jack Grubman, must defend class- action claims that they helped defraud WorldCom Inc. investors of $11 billion, a federal judge in New York ruled yesterday.
Mr. Grubman; WorldCom's founder, Bernard J. Ebbers; Citigroup; and other banks are accused of misrepresenting WorldCom's financial condition before the company filed for bankruptcy. Mr. Grubman, who left Citigroup in 2002, paid $15 million to settle charges that he tailored his stock ratings to win investment banking business for Citigroup. WorldCom Investor Case Cleared to Proceed as Class Action The New York Times October 25, 2003
With Ebbers and Sullivan fired WorldCom employed new bankers to help it through its bankruptcy. These bankers got their cut. A little over a year later, while Citigroup was still facing the music from angry investors WorlCom was coming out of bankruptcy.
Having been effectively concocted by Salomon five years ago, WorldCom is today relying on different New York investment bankers, the Blackstone Group and Goldman Sachs, to broker its deacessions and possible dissolution. And the best $600-an-hour New York criminal and bankruptcy lawyers are as furiously busy now as the best $600-an-hour New York securities and corporate lawyers were during the late 90's City of Schemes The New York Times October 6, 2002
WorldCom, which is being renamed MCI, is seeking to emerge from bankruptcy after its market value fell by almost $200 billion before the Chapter 11 filing in July 2002. WorldCom Investor Case Cleared to Proceed as Class Action The New York Times October 25, 2003
WorldCom Inc. underwriters must face fraud claims by Alabama retirement systems in state court, separately from other investors' federal court suits, after the U.S. Supreme Court refused to hear the banks' appeal.
Ashburn, Virginia-based WorldCom plans to emerge from bankruptcy this year as MCI Inc., the name of its best-known division. Prosecutors have charged WorldCom's former chief financial officer, Scott Sullivan, with accounting fraud, and are investigating WorldCom founder Bernard Ebbers. Citigroup, J.P. Morgan Lose Appeal Over WorldCom Case The New York Sun January 13, 2004