Pension Funds to Sue Banks over WorldCom Bond Losses

June 28, 2002 ( - Investment banks are coming under fire from pension funds for rubber stamping WorldCom bonds as investment grade.

The pension funds invested heavily in a May 2001 $11.9 billion WorldCom bond offering, which was underwritten by lead managers JP Morgan and Salomon Smith Barney. WorldCom will likely default on these bonds, rendering them worthless
The pension funds, which may file suit against the banks next week, may also file charges against Deutsche Banc Alex Brown, ABN Amro and Banc of America Securities, which also had a hand in the issue.

Fund Fray

While news reports note that the New York State Common Retirement Fund is seeking lead plaintiff status in one of the suits, the Florida State Board of Administration and the giant CalPERS, whose WorldCom bond losses stand at $60 million and $330 million respectively, will also join the fray.

The funds will likely charge that the banks improved their positions with WorldCom at the expense of investors since the telecommunications company used much of the proceeds of the $11.9 billion offering to service short-term debt with the banks.

In addition, lawyers say that the banks will face allegations that they are liable for any false information in the offering’s prospectus.

The banks denied responsibility for investor losses.