August 8, 2008
Citigroup Global Markets, Inc. and Citi Smith Barney have agreed to settle allegations stemming from its marketing and sales of auction rate securities. The firm marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk, a number of states alleged.
New York Attorney General Andrew M. Cuomo hailed the agreement as a turning point for investors nationwide seeking relief from the collapse of the auction rate securities market.
"The settlement sends a resounding message to the entire auction rate securities industry: this type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors in auction rate securities," said Cuomo. "Our goal is simple: to get investors back their money, and that's exactly what this deal does."
Under the settlement, Citigroup has agreed to buy back, no later than November 5, 2008, all illiquid auction rate securities from all Citigroup retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities since February 12, 2008. Their securities are worth more than $7 billion.
Citigroup will also:
• fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• consent to a special, public arbitration process to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• undertake to expeditiously provide liquidity solutions to all other institutional investors; and
• reimburse all refinancing fees to any New York State municipal issuer who issued auction rate securities through Citigroup since August 1, 2007.
In addition, Citigroup will pay a $50 million civil penalty to the State of New York. The penalty embraces both Citigroup's substantive conduct and its failure to properly comply with its obligations under the Attorney General's Martin Act subpoena.
Citigroup also will pay a separate civil penalty of $50 million to the North American Securities Administrators Association, whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.
