Citigroup announced the other day that it was paying an unexpectedly munificent $2.65 billion to settle lawsuits filed on behalf of investors in WorldCom, the telecom stock which collapsed after being hyped by Citigroup analyst Jack Grubman. (Mark Hamblett, “Citigroup Settles WorldCom Litigation”, New York Law Journal, May 11). According to a New York Sun editorial, two law firms noted for their work in shareholder class actions — Barrack, Rodos & Bacine and Bernstein Litowitz Berger & Grossman LLP — “stand to share a legal fee of up to $144.5 million for representing the lead plaintiff, the New York State comptroller, Alan Hevesi, in the case against Citigroup.” As it happens, both law firms donated generously to the political campaigns of Hevesi and his predecessor, Carl McCall. And while a chunk of the settlement will indeed flow into the coffers of New York state and city pension funds to compensate them for their losses in WorldCom stock — holdings worth around $306 million at their peak — it turns out that the same public entities own $1.6 billion in stock in Citigroup itself, which was hurt by the litigation (and which of course is also a major New York employer). In fact, the Sun notes in its detailed analysis of the affair, that “stock is worth about $45 million less now than it was before Mr. Hevesi’s heroics,” a sum that may or may not exceed what the city and state wind up gaining by recouping some of their WorldCom losses. (“Citigroup wake-up call” (editorial), New York Sun, May 11).
Addendum: a follow-up Sun editorial today (“Hevesi’s Haul”, May 14) unearths much new detail about the many connections between the New York comptroller’s office and the Barrack law firm, including a fund-raiser thrown for Hevesi at the firm’s Philadelphia headquarters, and its hiring of his chief lobbyist. It seems “the two law firms [Barrack Rodos and Bernstein Litowitz] and individuals and committees with ties to them poured a total of $121,800 into Mr. Hevesi’s campaign coffers in the year before an aide to Mr. Hevesi signed a retainer agreement with the firms stipulating that the fee ‘is presumptively fair, adequate and reasonable.'” And the Citigroup case is just the beginning: Hevesi is also “suing, on behalf of the New York State Common Retirement Fund, the rest of Wall Street, too: J.P. Morgan Chase & Co., Bank of America, Deutsche Bank, Lehman Brothers, Blaylock, CS First Boston, Goldman Sachs, UBS Warburg, ABN/Amro, Utendahl Capital Partners LP, Tokyo-Mitsubishi International PLC, Westdeutsche Landesbank, BNP Paribas, Fleet Securities, Mizuho International, and Caboto are all defendants in the same suit that Citigroup just settled. If they settle, too, the fee split by the two law firms representing Mr. Hevesi will swell even more. … The complaint the two law firms filed on behalf of Mr. Hevesi against Citigroup targets Citigroup telecommunications analyst Jack Grubman, referring to his ‘conflicted role as both investment banker and analyst.’ It quotes a Salomon Smith Barney retail broker calling Mr. Grubman a ‘[P]oster child for conspicuous conflicts of interest.’ Well, as far as conflicted roles, Mr. Hevesi’s has to be right up there with Mr. Grubman’s.” More: Apr. 14, 2005.