Citigroup Accounting Scandal

Accounting Scandals $2.65 billion. That is the amount the investment Citigroup agreed, less than a year ago, to pay to investors who had bought stock and bonds in the telecommunications giant WorldCom before its bankruptcy filing two years ago. If the adage that 'crime does not pay' is not always true, it is certainly valid when estimating the tremendous cost the WorldCom and Enron investing and accounting scandals have cost employees, investors, shareholder, and ordinary consumers.

(Morgenstern, 2004) The Citigroup settlement was the second-largest amount ever paid to settle a securities class action. It was the largest settlement ever granted by a bank, brokerage firm or auditor to settle a fraud case brought about by investors alleging that they had been deliberately mislead to buy securities issued by an outside corporation. Citigroup denied that it violated any laws when encouraging investment in WorldCom. Rather, it stated that it agreed to the arrangement to eliminate the uncertainties, burden and expense of litigation. (Morgenstern, 2004) Citigroup's chief executive, Charles O.

Prince, described fighting the litigation as a "roll of the dice" and noted that the bank faced legal claims of as much as $54 billion in the WorldCom matter. (O'Brien, 2004) Lest the $2.65 billion award settlement seem excessive, recall that the New York State retirement fund alone lost $300 million in its WorldCom investments. (Morgenstern, 2004) Under the terms of the settlement, Citigroup will have to make a payment of $2.65 billion, or $1.64 billion after tax, to the settlement class.

The settlement class "consists of all persons who purchased or otherwise acquired publicly traded securities of WorldCom during the period from April 29, 1999 through and including June 25, 2002," a number almost as impressive in its sweep as the award itself (Citigroup Press Release, 2004) The landmark Citigroup settlement came only hours before an appellate court was to hear arguments from the settlement class lawyers regarding the conflicts between the firm's allegedly inflated stock analysis and the investment banking fees generated by WorldCom.

(Morgenstern, 2004) Shareholders claimed that Citigroup and its star analyst, Jack Grubman, misled them about the WorldCom Company's prospects, causing them to lose tens of billions of dollars in investor wealth that they would not have otherwise, given that they would not have invested in the company without Citigroup's prompting.

Jack Grubman "fraudulently manipulated the underlying financial analyses he used to value WorldCom stock to maintain falsely inflated target prices for the stock and justify a 'buy' rating," even though WorldCom's performance did not satisfy acceptable criteria to earn such a rating," the brief said. (O'Brien, 2004) Although Citibank disagrees, it cannot deny that all of the money invested by the individuals engaged in the litigation had vanished when WorldCom collapsed in July 2002, despite the prestige of WorldCom's accountants.

(Or, one could argue, because of such prestige, else the creative or fraudulent accounting that hid the company's losses would have not gone on so long, had the KPMG name not been so widely regarded). (Morgenstern, 2004) In fact, another issue that may have precipitated the landmark settlement was other pending litigation that may be faced by Citigroup. Former U.S. Attorney General Richard Thornburgh issued a 500-page report stating that WorldCom may have had grounds to sue both KPMG LLP and Citigroup Inc.

For hundreds of millions of dollars because of misleading advice they gave the company before it filed for bankruptcy. (Talb, 2004) KPMG, the WorldCom Company's auditor, provided the company, it is alleged, with a flawed strategy for minimizing state taxes.

"The state-tax strategy is yet another example of the company converting what could be legitimate into something that appears improper as a result of its aggressive design and implementation." (Talb, 2004) WorldCom likely avoided "hundreds of millions of dollars in taxes between 1998 and 2001 by charging subsidiaries in various states more than $20 billion in royalties for services such as the foresight of top management, under the advisement of KPMG. The units deducted the royalty expenses for state-tax purposes, while the parent company was lightly taxed for them.

(Talb, 2004) In Citigroup's defense, other banks such as J.P. Morgan Chase have been accused of pushing the WorldCom stock to investors but Citigroups's relationship was said to be particularly 'symbiotic' with WorldCom. Nor are even accounting and investment issues pertaining to WorldCom the end to Citigroup's woes, as it is also accused of doing the same thing with the now infamously overvalued Enron stock.

According to the BBC News, "Enron's shareholders are still seeking damages from a long list of other big name defendants including the financial institutions JP Morgan Chase, Citigroup, Merrill Lynch and Credit Suisse First Boston," after allegedly hiding the Enron company's losses.

(BBC, 2005) In the case of Enron, the accountants of the respected Arthur Anderson firm are accused of hiding losses by not taking into account the company's operating costs, and recording all of the company profits as profits, without taking the necessary deductions for operating costs, depreciation, etcetera, as is standard in accounting procedures and accepted business practices. Citigroup's involvement with Enron is still scheduled to go to trial in 2006.

And for some ethical advisors regarding accounting and investing, Citibank should pay an even heavier price than the settlement it has already agreed.