Citigroup returning billions to investors

[Marika]

Citigroup returning billions to investors

Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators, who said the bank marketed the investments as safe despite liquidity risks.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords announced Thursday with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks must be completed by November.

The nation's largest financial institution also will pay a $50 million civil penalty to New York state and a separate $50 million civil penalty to the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency's enforcement director Linda Thomsen, said at a news conference.

In addition, New York-based Citigroup agreed to make its best efforts to liquidate by the end of next year all of the roughly $12 billion of auction-rate securities it sold to retirement plans and other institutional investors.

The $330 billion auction-rate securities market involves investors buying and selling securities backed by municipal bonds, student loans and other debt. Interest rates on the securities are set at periodic auctions, on the basis of bids submitted. The market collapsed in February amid turmoil in the credit markets.

More cases could be coming, as federal and state regulators have been investigating marketing of the securities by a number of big banks. Another case surfaced this week: the Massachusetts attorney general's office reached a settlement with investment firm Morgan Stanley for allegedly selling the risky auction-rate securities to cities and towns, but presenting the investments as safe.

As part of the settlement filed Wednesday, Morgan Stanley agreed to: repurchase $1.5 million in the securities it sold to a pair of local municipalities, review its client list, and fully reimburse any city or town that invested in auction-rate securities. The New York-based company said it was pleased to settle the case without financial penalty.

Cuomo's office sued the Swiss bank UBS AG last month over billions of dollars in sales in auction-rate securities, and other states have filed similar complaints. Massachusetts last week accused Merrill Lynch of fraud in promoting the sale of auction-rate securities.

In Citigroup's case, the regulators said the bank marketed the auction-rate securities to many of its customers as desirable and highly liquid investments, while in fact it failed to provide supporting bids for the auctions it managed when demand flagged. When Citigroup ceased to support the auctions in February, failures rippled through the market and thousands of the bank's customers were left holding illiquid securities, regulators said.

The agreement with the SEC, which must be formally approved by the agency's commissioners, "provides real relief to investors," Thomsen said. "In a short period of time, about 38,000 individual, small business and charitable organization(s) ... will receive nearly $7.5 billion in liquidity."

New York-based Citigroup neither admitted nor denied wrongdoing under the settlements. Its shares fell 77 cents, or nearly 4 percent, at $18.93 in early afternoon trading Thursday.

Cuomo had threatened to charge Citigroup with fraudulent sales of auction-rate securities and with the destruction of key documents. His statement Thursday doesn't mention fraud, but accuses Citigroup of making "misrepresentations" in its marketing and sales of the securities.

Citigroup said more than 50 percent of its retail clients' holdings in auction-rate securities "have been redeemed or auctioned at par (value) since the crisis began. We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients."

Analysts questioned the regulators' action.

"They keep finding ways to attack the industry and that will drive innovation out of New York City and to London, Tokyo and elsewhere," said Richard X. Bove, an analyst with Ladenburg Thalmann & Co.

Bove said investors should have researched what securities they were buying, and that authorities should have pursued individual traders that were misleading clients.

Citigroup recorded a $2.5 billion loss during the second quarter, and wrote down $12 billion worth of mortgage-backed securities and other risky investments. However, there is a significant difference between the near-collapse of the mortgage securities market and auction-rate securities.

In many cases, Citi and other banks found its portfolio of mortgage securities were worth 20 cents on the dollar. In the case of auction-rate securities, recent trading in the secondary market shows the investments are worth only a few cents below what they were originally worth.

There are other signs the market is rebounding. Citigroup holds some $5.6 billion of auction-rate securities on its books, according to a regulatory filling issued last week. During the second quarter, Citi said its Smith Barney unit recorded a $198 million pretax gain from the investments "as some liquidity returned to the market with a number of auctions being completed."

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AP Business Writer Joe Bel Bruno in New York and Associated Press writer Valerie Bauman in Albany, N.Y., contributed to this report.