NEW YORK (CNN/Money) -
Citigroup Inc. said Monday it will take a charge of $4.95 billion, or 95 cents a share, in its fiscal second quarter, due in part to a $2.65 billion pretax class-action settlement with holders of WorldCom securities.
The settlement -- reached through mediation -- will bring compensation to buyers of WorldCom securities from April 1999 through June 2002 who alleged that Citigroup's investment banking arm, then known as Salomon Smith Barney, participated in an improper relationship with WorldCom former Chief Executive Bernard Ebbers.
Citigroup, which admitted no wrongdoing in the settlement, said it also has increased its reserve for other pending class-action suits against it to $6.7 billion as it seeks to move beyond the financial scandals of the 1990s.
That figure excludes the WorldCom settlement costs and is roughly equal to Citigroup's profits during the first quarter.
"These are certainly huge numbers," said Kenneth Worthington, analyst with CIBC World Markets, who was waiting to hear more about the impact of the settlement during Citigroup's conference call with analysts Monday.
Citigroup (C: down $1.60 to $45.12, Research, Estimates) stock sank about 3 percent in afternoon trading. Shares of other financial services companies whose investment banking units are also targets by class-action lawyers -- including J.P. Morgan Chase, Bank of America and Merrill Lynch & Co. -- also fell, as concerns of rising interest rates hit the entire banking sector.
Citigroup said the charge will have no impact on the company's current dividend or dividend policy.
Analysts surveyed by First Call currently expect Citigroup to earn 97 cents a share for the second quarter, compared to second-quarter earnings of 83 cents a share reported by the company a year earlier.
"Citigroup is a growth company. It is important that we put this unfortunate chapter behind us so we can focus on our continuing prospects for growth," Citigroup CEO Charles Prince said in a statement.
"We feel very comfortable in saying that, with our advisers helping us, we have established a reserve that will cover all of our meaningful exposures," he added during a conference call.
Citigroup's decision to substantially boost its legal reserves offers a first view of what financial institutions will have to pay for their role as advisers, underwriters and researchers in the late 1990s market frenzy.
WorldCom fallout
The plaintiffs sought $54 billion in the class-action suit against Citigroup, accusing the world's largest financial services company of participating in the massive fraud at WorldCom through its dealings with the phone company, now known as MCI, which last month emerged from the largest bankruptcy in history.
Salomon Smith Barney allegedly helped WorldCom raise money from sales of securities, issued bullish research on its stock and gave Ebbers access to shares in hot initial public offerings in the period leading up to its $104 billion bankruptcy amid a massive accounting scandal that topped $11 billion in 2002.
In return, Salomon made more than $107 million in investment banking fees from WorldCom, the complaint alleged.
The company's former Chief Financial Officer Scott Sullivan has pled guilty to criminal charges and former Chief Executive Bernard Ebbers has been indicted.
Prince also said that New York State Comptroller Alan Hevesi agreed last Thursday to face-to-face discussions to negotiate the settlement between shareholders and Citigroup.
Hevesi, who is taking the lead in the class action case, was not immediately available for comment. He is the trustee of the New York State Common Retirement Fund, the lead plaintiff in the suit against Citigroup.
-- CNNfn's Allan Chernoff and Reuters contributed to the story
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