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Citigroup Reaches Auction Rate Securities Settlement with Pennsylvania

Jul 15, 2009 | Parker Waichman Alonso LLP

Citigroup has reached an agreement with the state of Pennsylvania over auction rate securities.  Under the settlement, Citigroup will pay the Pennsylvania Securities Commission $2.31 million, and offer to buy back auction rate securities from 1,200 retail investors in Pennsylvania who held the securities from Citigroup as of Jan. 21, 2008.

Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents. Unfortunately, because of the credit crises, the market for auction rate securities crashed earlier in 2008 Thousands of investors were bewildered to find out that the investments they were sold as cash equivalents were illiquid.

Various state and federal agencies have been investigating the auction rate securities crash, amid suspicions that investment banks misled their clients about both the liquidity of the vehicles and safety of the market.  Over the past year, various institutions have reached agreements with regulators, including UBS AG, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley, Merrill Lynch & Co., and Wachovia Corp. to buy back more than $60 billion of auction rate securities from their clients.

The Pennsylvania settlement with Citigroup is part of a larger settlement reached with 12 states.  The settlement requires Citigroup to offer to buy back $978.1 million worth of auction-rate securities from the Pennsylvania investors.

According to the Philadelphia Inquirer, in May, New Jersey reached a settlement with Citigroup requiring the bank to pay $3.3 million and offer to repurchase as much as $623.5 million in auction-rate securities from 2,873 individual investors in the state.

Delaware reached a settlement with Citigroup in April, requiring the firm to pay a $309,000 fine.