Citigroup Faces Auction Rate Lawsuit, SEC Investigation

By Antonio Perez
Antonio Perez
Antonio Perez
August 3, 2008 Updated: August 3, 2008

NEW YORK—Citigroup Inc.., the largest U.S. bank by assets, said that federal regulators and the Securities and Exchange Commission (SEC) have subpoenaed information from the bank regarding sales of auction rate securities, a type of investment banks peddle to its clients.

SEC is investigating whether the bank violated securities laws.

In a separate development, New York State Attorney General Andrew M. Cuomo sued Citigroup last Friday, claiming that the bank falsely represented the nature of the securities as liquid and safe investments.

Auction rate securities are corporate or municipal bonds with variable interest rates which are reset periodically in auctions.

In February of this year, the market for auction rate securities became frozen as the demand for the investments was far less than the supply. Broker-dealers such as Citigroup ran such auctions, and in the past hailed these securities to customers as highly liquid short term investments.

Many corporations and wealthy individuals buy auction rate securities as a short term cash management strategy. As the market for such securities soured, investors were left with securities that they were unable to sell.

According to Cuomo, Citigroup committed fraud by falsely representing the instruments as safe and liquid, and that the bank deleted its phone history after receiving a subpoena.

The auction rate security market topped $330 billion in early 2008, according to data from Wall Street Journal.

Cuomo’s office is seeking a settlement from Citigroup where the bank would buy back the securities at face value and reimburse customers for any losses or damages incurred.

Last month, Cuomo sued Swiss banking giant UBS AG with similar charges over auction rate securities, alleging that the bank pushed the troubled securities onto its customers. The Attorney General’s office learned earlier that UBS executives personally sold $21 million worth of these securities upon learning of liquidity problems.

“Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag,” said Cuomo in a released statement.

In mid-July, regulators investigated Wachovia’s St. Louis office, seeking information on the company’s records and internal communication associated with its sale of auction rate securities.

Antonio Perez
Antonio Perez