Citigroup In Talks To Settle Auction Rate Securities Problem
On the heels of New York Attorney General Andrew Cuomo’s announcement he is planning to sue the nation’s biggest bank on fraud charges over auction rate securities sales and destruction of subpoenaed documents, Citigroup, Inc. apparently decided that resolving the matter with Cuomo might be the best solution.
As reported in the Wall Street on Aug. 6, Citigroup is in talks with state regulators and the Securities and Exchange Commission (SEC) in an attempt to put to rest allegations of wrongdoing over its marketing and sales of auction rate securities. If an agreement is reached, Citigroup may spend more than $5 billion to buy back the illiquid securities from investors whose funds have been frozen when the auction market seized up seven months ago. In addition, Citigroup could face a fine of up to $100 million.
Citigroup, which is one of the largest underwriters of auction rate securities, has been the subject of an investigation by New York Attorney General Cuomo for the past five months. On Aug. 1, Cuomo threatened to file charges against the New York-based bank, alleging that it destroyed critical documents and telephone recordings of its auction rate desk that were under subpoena by his office.
In addition, Cuomo contends Citigroup “repeatedly and persistently committed fraud†by falsely representing auction rate bonds as safe, liquid and the equivalent of cash to investors.
Citigroup also revealed on Aug. 1 that the SEC has opened a formal probe into its sales of auction rate securities.
Following the collapse of the $330 billion auction rate market in February, state and federal regulators have been busy examining a number of financial services institutions - including Bank of America Corp, Merrill Lynch, UBS, Wachovia, Morgan Stanley and Goldman Sachs - and their marketing practices regarding auction rate securities. Investors currently hold more than $200 billion in the frozen instruments - investments they had been led to believe were similar to money-market funds and “cash-alternatives.â€
Should Citigroup reach an agreement with Cuomo’s office, it might very well open the door for other investment banks and securities firms to settle their own mishandling of auction securities with state and federal regulators.
Meanwhile, for the thousands investors who were pitched auction rate securities as cash equivalents and then kept in the dark about their liquidity risks, the latest news gives them reason to be cautiously optimistic.
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