Calpers Sues WorldCom Bond Underwriters
These days underwriting a bond deal can be dangerous to an investment bank's health.
On Tuesday, three big California pension funds filed suit against the investment banks that underwrote a $12 billion corporate bond issue for WorldCom (WCOME), the ailing telecom giant that's accused of cooking its books.
The pension funds allege that the investment banks failed to perform adequate due diligence before underwriting the bonds and if they had, the firms would have detected some of the $4 billion accounting fraud that's alleged to have gone on at the long-distance carrier. The pension funds, led by Calpers, are seeking $318 million in damages to cover their losses on bonds that are now all but worthless.
The main defendants in the lawsuit are Citigroup (C) and J.P Morgan Chase (JPM), the lead underwriters on the bond issue. Also named are Bank of America (BAC) and Deutsche Bank, which participated in the bond issue."Our interest is in getting some of our losses back, but to also send a message to the underwriters of the world that they need to look under every rock before they sign their name to a bond deal,'' says Pat Macht, a spokeswoman for Calpers. "If we can't depend on the due diligence of the underwriters, how can we ever buy bonds. It's about rebuilding investor confidence.'' The lawsuit, Macht says, is consistent with Calpers' long history of advocating market reform and serving as an aggressive proponent of shareholder rights.
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