Arbitrators have awarded $75,000 to a longtime WorldCom Inc. employee who argued that bankers contributed to her financial losses by profiting from their relationship with the struggling company and its chief executive at the same time they administered a stock-options program for WorldCom workers.
A three-member arbitration panel ruled that Citigroup Inc.'s Salomon Smith Barney unit violated its fiduciary duty to the workers by granting favors to company founder Bernard J. Ebbers to help win lucrative investment banking fees. Salomon Smith Barney's pursuit of those fees was in conflict with its duties to former WorldCom employees, who lost millions of dollars when the company in 2002 made the nation's largest Chapter 11 filing for bankruptcy protection, the arbitrators ruled.
SSB, now known as Citigroup Global Markets, received more than $160 million in banking fees from WorldCom in the four years before the telecommunications giant collapsed, arbitrators said. The unit also reaped fees for financing deals and loans to Ebbers and for exclusively administering WorldCom's employee stock-option program.
"The nexus between SSB and WorldCom is so strong that it is impossible to separate one's interest from the other," the arbitrators wrote in their ruling. "In the very least their relationship is not one of arm's length. The conflicts of interest are rife throughout the testimony presented in this case."
Legal experts said the ruling by an arbitration panel of the National Association of Securities Dealers, first reported by the Wall Street Journal, could be a bellwether for other WorldCom workers devastated by the $11 billion accounting fraud.
Jacob H. Zamansky, who represents several WorldCom employees in similar arbitration disputes, said he and other lawyers would use the decision as "ammunition" in hundreds of other cases.
"It's a very important decision in holding Citigroup accountable for the WorldCom fraud," Zamansky said.
"Somebody had to set the bar. It's not the amount she got, but the reasoning behind the decision."
Arbitration rulings are tailored to the facts of a particular case, and the legal rationale of one arbitration panel is not automatically adopted by others as precedent, said Columbia University law professor John C. Coffee Jr.
Linda Naples, a 17-year employee at the telecommunications giant, claimed in court papers that she lost $1.15 million in stock options and retirement savings accounts when WorldCom disclosed the massive accounting fraud.
Arbitrators gave Naples a small portion of the total damages she requested, reasoning that her stock options were mostly worthless at the time the bank made big personal loans to Ebbers and that WorldCom itself was "primarily responsible" for the massive investment losses borne by its employees.
The arbitrators denied her claim against former Citigroup analyst Jack B. Grubman, saying that Naples had not proved that she directly relied on his optimistic research reports when making investment decisions.
Adam S. Doner, a lawyer for Naples, did not return calls yesterday.
A Citigroup spokeswoman said in a prepared statement, "While the panel's conclusions largely support our position in this case, they misinterpreted the law in some respects, and we will be moving in the federal courts to vacate the decision."
To prevail on appeal, Citigroup would need to prove that the panel "acted in manifest disregard of the law," a high standard that often is difficult to meet, Coffee said.
WorldCom has since emerged from reorganization and changed its name to MCI Inc.
Its founder, Ebbers, is scheduled to stand trial on securities fraud and other criminal charges in a New York federal court Jan. 18.