Lawsuit against Citigroup over WorldCom kept alive

NEW YORK, June 3 - A federal appeals court in New York has kept alive a lawsuit against Citigroup Inc and the now-discredited analyst Jack Grubman by investors who said they were bankrupted by losing nearly $200 million from investing in WorldCom Inc stock.

A three-judge panel of the U.S. Second Circuit Court of Appeals found that a district court judge prematurely dismissed the case against Grubman and the Citigroup brokerage unit once known as Salomon Smith Barney.

It asked the Georgia Supreme Court for guidance on what it called three unresolved claims depending on that state's law, including alleged fraud in the sale of WorldCom stock, whether Citigroup's actions proximately caused the plaintiffs' losses, and whether the brokerage owed any fiduciary duties.

"Each issue is critical to the resolution of this litigation," Judge Jose Cabranes wrote for the panel.

The plaintiffs alleged they had ordered their Salomon Smith Barney broker to sell their 2.1 million WorldCom shares in June 1999, when the shares traded around $92, but the broker advised against a sale on the basis of Grubman's positive research.

Citigroup was not immediately available for comment. On Monday, the bank put the brokerage into a joint venture with Morgan Stanley, which now holds a 51 percent stake.

In 2004, Citigroup agreed to pay roughly $2.58 billion to settle class-action litigation accusing it of hiding risks from investors when it helped WorldCom sell stock and bonds.

The phone company's bankruptcy is still the second-largest Chapter 11 filing in U.S. corporate history. WorldCom filed for protection from creditors in July 2002, and Grubman resigned from Salomon a month later. Banks have since separated research analysts and investment bankers to reduce potential conflicts.

The case is Holmes v. Grubman and Citigroup Global Markets Inc, U.S. Court of Appeals for the Second Circuit (Manhattan), No. 06-5246.