- The Washington Times - Friday, August 8, 2008

NEW YORK | Citigroup Inc. agreed to buy back or help clients unload $19.5 billion in auction-rate securities and pay a $100 million fine to settle U.S. regulatory claims it improperly saddled customers with untradeable bonds.

Citigroup will buy back about $7.5 billion in securities from individual customers, charities and small businesses under a settlement with New York State Attorney General Andrew M. Cuomo, the Securities and Exchange Commission and a group of states, led by Texas, the SEC said Thursday.

The banker must also start “restoring liquidity” to more than 2,600 institutions holding about $12 billion of the instruments, the SEC said.

Citigroup is the first Wall Street firm to settle federal claims amid a probe into how banks sold auction-rate securities before the $330 billion market collapsed in February. The accord may set a precedent for negotiations with firms including UBS AG, which has been named in civil complaints by Mr. Cuomo and authorities in Massachusetts.

“Firms that don’t settle are going to be frowned upon by investors,” Texas State Securities Commissioner Denise Voigt Crawford said.

Citigroup agreed to buy back illiquid securities from about 40,000 customers by Nov. 5 and compensate clients who already sold their holdings at a loss, according to Mr. Cuomo.

The accord also requires that the New York-based bank make “best efforts” to help 2,600 institutions by the end of 2009, the SEC said. Mr. Cuomo reserved the right to take legal action, and the SEC may seek a fine, if the bank doesn’t do enough for those investors.

The company also agreed to reimburse refinancing fees to municipal borrowers that issued auction-rate securities through Citigroup since Aug. 1, 2007, according to the New York attorney general.

Citigroup neither admitted nor denied wrongdoing.

Citigroup estimated that securities eligible for the buyback have a face value of $7.3 billion and may be worth about $500 million less on the market than their purchase price. Under accounting rules, Citigroup may have to record a pre-tax loss to reflect the difference.

The accord is another blow to Citigroup Chief Executive Officer Vikram Pandit, who recorded a $2.5 billion loss in the second quarter because of $12 billion of write-downs and increased bad-loan reserves. Citigroup shares fell $1.23, or 6.2 percent, to close at $18.47.

“This is very unusual,” said J. Boyd Page, a lawyer at Page Perry LLC in Atlanta specializing in securities fraud. “Anything of this magnitude is unprecedented.”

Other firms that sold the securities are also nearing the completion of talks to resolve regulatory probes, a person involved in the negotiations said Wednesday.

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck in what had been pitched to them as money-marketlike instruments.

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