Citigroup Wins WorldCom Arbitration

Individual investor claimed he relied on Jack Grubman's research reports; had sought $900 million.

Score one for Citigroup Inc. and Wall Street. A three-person arbitration panel of the National Association of Securities Dealers rejected the claim of an investor that he should be compensated for holding on to nearly 21 million shares of WorldCom on the advice of former Citigroup telecom analyst Jack Grubman, according to The Wall Street Journal.

The wealthy 73-year-old investor, Donald Sturm, reportedly asserted that he had acquired his stake in WorldCom — worth $1.29 billion at its peak — in 1996, when the telecom giant bought a company in which Sturm held a large interest. After WorldCom (now MCI Inc.) filed for bankruptcy, its common stock was deemed worthless. Sturm reportedly sought $900 million from Citigroup.

In 2003, Grubman, without admitting or denying wrongdoing, agreed to a huge fine and a permanent bar from the securities industry for issuing allegedly fraudulent research, but not on WorldCom, the Journal pointed out. According to the newspaper, Sturm claimed he relied on Grubman’s research reports and had “direct access” with the analyst, who he asserts personally influenced his decision to do business with Citigroup; Sturm also asserted that the research was flawed.

The Journal noted that the ability to prove reasonable reliance would have been crucial to Sturm’s argument. For its part, Citigroup reportedly argued that Sturm was a sophisticated investor with many advisors of his own.

Like all securities-arbitration hearings, this case was conducted privately, according to the newspaper, and the NASD panel didn’t release the specific reasons for its ruling. And unlike court decisions, the paper added, the results of arbitration don’t set precedents.

Citing plaintiffs’ lawyers and executives, however, the Journal did note that Wall Street seems to be winning many more research-related cases than it is losing. Several months ago, for example, about 300 investor claims against Merrill Lynch & Co. were settled for about 3 cents on the dollar.

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