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Citigroup Agrees to Buy Back Securities for $7 Billion

Published: August 7, 2008

Citigroup announced an agreement on Thursday to buy back more than $7 billion of auction-rate securities from investors to settle claims that it misled clients about the dangers of the investments.

The settlement, with state and federal regulators, included a fine of as much as $100 million.

In a statement, the New York attorney general Andrew Cuomo said that Citigroup would buy back, by Nov. 5. auction-rate securities from individual investors, charities and small- and mid-sized businesses. These customers, about 40,000 nationwide, have been unable to sell their securities since Feb. 12, the statement said.

“Our goal is simple: to get investors back their money, and that’s exactly what this deal does,” Mr. Cuomo said.

In a similar case in Massachusetts, Morgan Stanley reached an agreement with the attorney’s general office on Thursday to reimburse the cities of New Bedford and Hopkinton $1.5 million for the investments in the securities, the Massachusetts attorney general Martha Coakley said in a statement.

“We appreciate Morgan’s cooperation and are pleased that it has agreed to perform this thorough review of all its city and town clients in the Commonwealth in order to determine whether additional reimbursements are appropriate,” Ms. Coakley said.

Regulators have been investigating at least a dozen Wall Street firms for their role in the sales and marketing of so-called auction-rate investments, and analysts expect a wave of settlements in the next few months.

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. The $300 billion market for the investments collapsed in February, trapping investors who had been told that the securities were safe and easy to cash in.

As part of the settlement, Citigroup agreed to a public arbitration process to resolve claims of consequential damages suffered by retail investors.

The bank, one of Wall Street’s biggest auction-rate securities dealers, will pay the $100 million fine to settle with the New York attorney general’s office and a task force of 12 state regulators, led by the Texas State Securities Board. Each group would exact a $50 million penalty.

The federal Securities and Exchange Commission also participated in the settlement talks but elected not to exact a penalty, pending its own investigation.

The settlement follows several days of meetings between Citigroup and the state and federal regulators, and reflects Citigroup’s desire to put its auction-rate securities troubles behind it.

Thursday’s settlement has implications for other Wall Street firms, with the Citigroup deal serving as a benchmark for the industry. Two other banks, UBS and Merrill Lynch, are under investigation by several groups of regulators. But unlike Citigroup, UBS faces additional accusations that at least one of its executives engaged in insider trading.

Citigroup shares were down about 3.5 percent Thursday; Morgan Stanley shares were down less than one percent.

Jenny Anderson contributed reporting


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