Securities Regulators Announce Settlement with Citigroup in Auction Rate Securities Investigation

WASHINGTON, D.C. August 7, 2008— North American Securities Administrators Association (NASAA) President Karen Tyler, Texas Securities Commissioner Denise Voigt Crawford, and New York Attorney General Andrew Cuomo, and the Securities and Exchange Commission announced today that a settlement has been reached with Citigroup, Inc., which will give thousands of Citigroup clients access to billions of dollars in funds that have been frozen in the auction rate securities (ARS) market.

The settlement concludes an investigation led by the Texas State Securities Board into allegations that Citigroup misled its clients by falsely assuring them that ARS securities were as safe and liquid as cash.  The ARS markets froze in February this year, triggering a flood of complaints from investors who could not withdraw money from their accounts.  States received complaints from a wide range of investors who suffered significant financial damage because the money they were told was liquid was tied up in the frozen ARS market.

“This 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,” said Tyler.  “Securing a liquidity solution for investors has been the primary objective of our investigations, and this agreement achieves that goal.”

Under the terms of the settlement announced today by state and federal regulators, Citigroup will offer to repurchase at par, no later than November 5, 2008, all auction rate securities from all Citigroup retail customers who held those securities at the time the auction market failed on February 12, 2008.  For purposes of the settlement, retail customers are defined to include individual investors, all businesses with account values of up to $10 million, and all charities regardless of account values.

Citigroup will also:

  • Reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
  • Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors who were unable to access their funds, in which Citigroup will concede liability related to its sale of auction rate securities;
  • Undertake to expeditiously provide liquidity solutions to all other institutional investors; and
  • Reimburse all refinancing fees to any state municipal issuers who issued auction rate securities through Citigroup between August 1, 2007 and February 11, 2008, and who refinanced those securities after February 11, 2008.

In addition, Citigroup will pay a $50 million penalty to the States and an additional $50 million penalty to New York.  The penalties reflect issues arising from Citigroup’s sale of auction rate securities to investors as well as Citigroup’s destruction of records required to be maintained under state law.

“This was a well-coordinated, collaborative effort, and it’s a terrific example of efficient and effective enforcement work by state securities regulators,” said Crawford.  “We also want to commend Citigroup for arriving at a solution that addresses the needs of its clients, many of whom have faced real hardship after losing access to their money,” she added.  In many cases, clients’ ARS holdings were not only frozen, but also lost value.

The investigation into possible violations by Citigroup is part of a larger state-led effort to address problems in connection with the offer and sale of ARS securities.  Earlier this year, state offices began receiving hundreds of complaints from Main Street investors.  As a result, in April, NASAA announced the formation of a multi-state Task Force, comprised of securities regulators in 12 states, to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS securities. The ARS Task Force is chaired by Bryan Lantagne, Director of the Massachusetts Securities Division.

The members of the Task Force are continuing their investigations into possible misconduct by other firms.  To date, enforcement actions alleging fraud and other violations in connection with ARS securities have been filed by Massachusetts, New York, and Texas against UBS.  In addition, Massachusetts has filed an action against Merrill Lynch.

“The settlement with Citigroup represents a major step forward in the efforts by state securities regulators to secure fast and much needed relief for investors all across country who were induced to buy ARS securities,” observed Lantagne, Chair of the NASAA Task Force.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

For more information:
Bob Webster, Director of Communications

Rex Staples, General Counsel

Print Friendly, PDF & Email
2008 Headlines, ARS, Enforcement Activity, Issues & Advocacy, Legal Activity, Newsroom