Exclusive Online Only Content
Citigroup Agrees in Principle to Repay $7.5 Billion in ARS Settlement
August 7, 2008
Citigroup Global Markets has reached a preliminary settlement agreement with the Securities and Exchange Commission to repay individual investors all the money they invested in auction rate securities (ARS) with the firm.
Under the agreement, announced today, about 38,000 individuals, small businesses and charitable organizations would receive nearly $7.5 billion. Citigroup is also required to make its “best efforts” to liquidate by the end of 2009 all $12 billion of the illiquid ARS it sold to more than 2,600 retirement plans and other institutional investors.
The $330 billion ARS market collapsed in February, leaving Citigroup clients holding nearly $20 billion of the securities (Securities Industry News, April 14). “The conduct underlying the proposed charges stems from Citigroup’s marketing of ARS to many of its customers as highly liquid investments, including as money market investments,” said the SEC in a statement. “The liquidity of these securities, however, was premised on Citigroup providing support bids for auctions it managed when there was not enough customer demand. When Citigroup stopped supporting auctions … there were widespread auction failures.”
The SEC said it received substantial assistance in the investigation from the Financial Regulatory Authority (Finra), New York Attorney General Andrew Cuomo, the North American Securities Administrators Association (NASAA) and Texas securities authorities. “This settlement in principle is an outstanding example of federal and state regulatory cooperation for the benefit of investors and markets,” said Linda Chatman Thomsen, director of the agency’s division of enforcement. “Today’s agreement in principle provides real relief to investors.”
In a separate statement issued by the NASAA, president Karen Tyler said that the settlement represents a “major victory for investors who for months now have been unable to access their funds at Citigroup because those funds were placed in auction rate securities.”
The terms of the agreement, which is subject to finalization, review and approval by the SEC, also require Citigroup to provide notice to all customers of settlement terms, establish a telephone assistance line to respond to questions from clients about the settlement, and participate in a special arbitration process overseen by Finra under which claims will be heard by a single, non-industry arbitrator.
Arbitration will be voluntary, according to the SEC. “A customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer,” said the commission.
Citigroup must also provide no-cost loans to customers that will remain outstanding until the ARS are repurchased, as well as reimburse clients for any interest costs incurred under any prior loan programs the firm provided. Additionally, Citigroup faces the prospect of an undetermined financial penalty after it has completed its obligations under the agreement.
The Citi investigation is part of a larger effort to address problems with the marketing of auction rate securities. Earlier this year, state regulators began receiving hundreds of complaints from individual investors, resulting in the formation of a 12-state task force of regulators to investigate whether Wall Street firms systematically misled investors when selling them the securities. The task force is continuing to look into possible misconduct by other firms.
To date, enforcement actions alleging fraud and other violations in connection with ARS have been filed by Massachusetts, New York and Texas against UBS. Massachusetts has also filed an action against Merrill Lynch & Co.
